An optimist, they say, is someone who jumps off a 30-story building and, on her way past the seventh floor, shouts, “so far, so good.”
Look out below. I’m about to take the leap.
It’s professionally risky to sound like a good-time Charlie, with business profits slowing and investors wondering what that means. Nevertheless, the economy looks sound, which means that this historic bull market should have room to run.
Yes, growth may slow. Some corporate profits will disappoint. At any moment, stocks may suddenly “correct,” dropping as much as 15 percent or so. But corrections during bull markets are brief. When they’re over, stocks typically rise higher than ever. Here’s my case for feeling good:
? Recessions aren’t inevitable. They result from bad government policies or unforeseen shocks, like the Persian Gulf War. By definition, I can’t discuss the unforeseen. So let’s talk policy.
Every recession since 1946 has been preceded by a sharp run-up in inflation, usually caused by imbalances in the economy. (The 1990-91 turndown arguably arose from the oil-price shock when Saddam Hussein invaded Kuwait.) Inflation brings higher interest rates and tighter monetary policies, which put a squeeze on business.
Today, thanks to the Federal Reserve, we have negligible inflation just 0.2 percent in the first quarter and 1.7 percent last year. Fed Chairman Alan Greenspan, the inflation-fighter-in-chief, holds his job at least until June 2000. Even if he decides to retire, everyone else at the Fed is chanting from the same prayer book.
? Real wages have recently been rising, giving consumers more purchasing power. That could be inflationary. But so far, wage hikes have been covered by rising productivity (defined as what a worker can produce in an hour), so they’re not forcing prices up. “We’re learning that you can have low inflation and low unemployment, too,” says economist William Niskanen, chair of the Cato Institute in Washington, D.C.
? The economy shows no imbalances that need cleaning out. Growth has proceeded at a moderate pace, new technology continues to cut business costs, trade is freer than it used to be, deregulation is working its magic and peace is boosting global growth. “This is the best business-cycle expansion in our history,” says Allen Sinai, chief global economist for Primark Decision Economics in New York.
? We’re a magnet for international money. That’s because our rate of return on capital is significantly higher than in other rich nations of the world, Niskanen says. Our traditional measures of stock-market value are based primarily on domestic sources of funds. International investment flows could be driving up prices to levels beyond our past experience.
? It’s a waste of good worry-time to compare the United States with Japan in the 1980s. Japan’s bubble stock market drew from the profits in land speculation and the efficiency of its export sector. But its basic economy was a mess rigid, inefficient and shielded from competition.
By contrast, the United States upended itself in the 1980s, to restore its economy to powerhouse mode. Stocks may stall occasionally, but there’s no bubble here. This rise has been backed by solid increases in earnings and competitiveness.
? The market’s astonishing gains may be capitalism’s way of saying “I’m sorry.” Stocks went nowhere from 1966 to 1982 never rising much above 1,000 on the Dow. These past 15 years amount to a catch-up, says Jeremy Siegel, professor of finance at the Wharton School in Philadelphia and author of the fine book, “Stocks for the Long Run.”
If you average the 15 good years with the 16 bad ones, you get an annual return of 7 percent above inflation, with dividends reinvested just about the stock market’s historic trend.
But give up your fantasies of permanent, 20 percent annual returns. Siegel sees future, nominal increases at a more typical 9 percent to 10 percent. If profits dip lower than investors now expect, there might be a stutter before another market rise.
But nothing says that a stutter has to degenerate into a plunge. What’s more, even if prices sank by 27 percent, as they did during the 1987 crash, we’d still be as rich as we were almost exactly one year ago.
If good times continue until Christmas, this will become the longest peacetime business expansion ever, outlasting the previous record in the 1980s. If business moves ahead until February 2000, we’ll even beat the wartime record, run up in the 1960s, during the buildup for Vietnam. That’s the goal for us optimists: the longest expansion in American history.
Increase scope of FHA
It’s time to take another look at a housing proposal that has the potential of raising the number of people who can buy their own homes.
At issue is the scope of the Federal Housing Administration (FHA), which insures mortgages for people with minimal down payments. By law, it can accept only mortgages of a modest size. The FHA wants to graduate to larger loans.
If Congress allows this change, more middle-income people would qualify for government-insured loans. And more older people could use the FHA’s excellent reverse-mortgage program (the Home Equity Conversion Mortgage).
When you want to buy a house with a down payment under 20 percent, the lender requires mortgage insurance to guarantee against default. Private insurers guarantee the majority of mortgages. But they normally don’t take loans with tiny down payments or deal with borrowers who present above-average risks.
That’s where the FHA steps in. It accepts down payments as low as 3 percent of the property’s first $25,000 in value, 5 percent of the next $100,000 and 10 percent of the rest (or 3 percent on a home worth $50,000 or less).
But the program is limited by the size of loans that the FHA is allowed to make. Currently, there are 250 different FHA loan ceilings in various parts of the country, each of them pegged to local average home values. The maximum loan runs from $86,317 to $170,362.
The FHA wants to raise its loan limit to $227,150. This change might generate an extra 54,000 FHA mortgages a year, officials estimate.
Larger mortgages could actually improve the FHA’s finances. More money should come in from fees than is paid out to cover defaults, according to a projection by the Office of Management and Budget.
America’s home ownership rate stands at a record 66 percent, so the private market is doing fine. Larger FHA loans would get into corners the private market hasn’t reached.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
