Excessive pessimism in other areas has been more costly. Virtually all the market geniuses who hung on as the Dow was scythed in half between October 2007 and March 2009 failed to call the market turn. Most hedge-fund managers have chased the 60 percent rally since March, not led it. Economic forecasters similarly missed the dramatic turn in the overall economy this spring. Having failed to forecast that the economy would shrink at a 6 percent annual rate through the first quarter of 2009, economists also failed to project it would start growing again at a decent pace in June. And they're still behind the curve. My bold prediction for 2010 is that the consensus of the forecasters surveyed by the Philadelphia Federal Reserve, which projects the economy will grow only 2.4 percent in 2010, is too pessimistic, perhaps by half.I guess that at heart I believe in American ingenuity and optimism. I think the US will see a recovery in 2010. I have no real basis for my belief other than "gut feel" (and we know how badly that misled George Bush!).
As late as August, not even the most cockeyed optimist would have projected that, within four months, Bank of America, Citi, and Wells Fargo would return nearly $100 billion in borrowed funds to the taxpayers. But they did. On Dec. 23, the same day Citigroup and Wells Fargo paid back $45 billion in TARP funds, six smaller banks also exited the program. A year from now, the only TARP we care about may be the one rolled out when it rains during baseball games.
I don't expect all the pessimists to be swayed by a quarter or two of good results. There are those who can't fathom recovery for ideological and political reasons, the fools who believe—despite the evidence of the past 16 years—that the economy and the markets favor Republican presidents and policies over Democratic ones. Some pundits, meanwhile, have staked their professional reputations on the proposition that Keynesian economics no longer work and that the United States is in terminal decline.
Then there's a large population of non-ideologues who may not fully embrace the narrative of economic recovery because they don't feel it yet in their paychecks, portfolios, or home values. Try telling a laid-off autoworker in Michigan or a laid-off magazine editor in Brooklyn that things are better. But they may soon be in for pleasant surprises, too. For all the advances of information technology, big economic turns always take us unawares. In 2007, all indicators flashed green—until the bottom suddenly fell out. In this environment, things can look awful, until a new order unexpectedly comes in or a few deals break in your firm's favor. All of a sudden, things seem much better. We're in a Missouri economy now, one in which recovery has to be shown, not told. Economic conditions may be improving, but it still may take more than a few quarters of growth before people fully commit to recovery, both financially and psychologically. If credit means belief, since the credit crisis began two years ago, belief has been in short supply. Maybe it's time for a little blind faith.
Sunday, January 3, 2010
Daniel Gross' Optimism
I like Daniel Gross. I have no real reason for believing his predictions, but I like his optimism. Here's a key bit from his Slate posting: