Robert Stein 1924-2014

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Sunday, May 03, 2009

Swine Flu Economics: Good News

The Wall Street pandemic may go away. Warren Buffett gave his State of the Union Address yesterday and offered some hope to the frightened populace, and Robert Shiller, the irrational-exuberance expert, says the current Depression scare has been "relatively mild."

"In the last few months you've seen a real pickup in activity although at much lower prices," Buffett said during the annual Omaha stockholder pilgrimage, citing data from Berkshire Hathaway's huge real estate brokerage business.

The slowdown of new housing starts from 2 million a year to the current 500,000 will ease the crisis. "We're going to eat up inventory," he predicted. "That may take a couple of years. When it gets done you will have stabilization in housing prices. Then you will have demand for more housing starts."

In a New York Times OpEd today, Shiller, who specializes in market bubbles, comforts us with the news that this Depression scare may dissipate because we as consumers of economic news are too stupid to understand it.

During earlier Depression scares, he writes, "out-of-control inflation was widely visible, but today many people haven’t personally experienced rising unemployment and foreclosures. And it’s possible that the optimistic tone of the president and the Fed has assuaged some fears, and that people might believe that the government is fixing their problems.

"This time, the reasons to fret about a possible depression may seem less concrete. For most people, the worries that consume economists and accountants, about things like bank stress-test results or the 'OIS-Libor spread,' are rather hard to comprehend."

But it is still not time to breathe easier. Buffett warned his shareholders that government stimulus efforts could infect both Berkshire Hathaway and its subsidiary, the US economy, with higher inflation.

So don't put away the fiscal face masks and vaccines quite yet.

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