Some Optimism

A comment over at Free Exchange about how the market psychology that led to inflated asset prices during the boom might also apply to the downturn. In other words, we can overshoot on the way down as well. This points to the inherent difficulty in seeing beyond the immediate trend to predict future events.

The article includes optimistic prognostications about the length of the downturn from James Surowiecki and economist heavyweight Kenneth Rogoff. Nice to see that my prediction of a couple months back is still in good company. Here's Rogoff:

Still, it must be noted that negative output growth for more than two years is a relatively rare event, even in the aftermath of severe banking crises. Historical statistical relationships are perhaps cold comfort in a downturn that now seems so insidiously different from previous catastrophes. But they should not be dismissed.

There, I feel better already. And certainly if I had any money, I'd be investing it right now. But that aside, there's still the interesting question about whether the boom & bust cycle is in fact the result of "a herd of hysterical lemmings," as Free Exchange puts it, or rational economic actors responding to a poorly structured market environment. The answer, as Mark Thoma discusses, matters a great deal for what policies are going to be most useful in softening the downturn.

I'm still leaning towards the hysterical lemming model, but that's mainly because I prefer the mental image...

(image from consumeist with apologies to Larson)