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Paul Krugman makes a point I've been wondering about:
What I don't know is how serious the real consequences of the financial-market stuff ends up being on Main Street. If all of the fancy financial instruments that have been so popular these past couple of decades sort of roll over, it's still not entirely clear to me how that ends up affecting the real economy. Will a lot of business investment just go on unaffected because companies can pay for it out of retained earnings or by borrowing with good old bank loans? How much in the end does the ability of consumers to keep spending get affected by what's going on in fairly abstruse financial markets? So I'm not quite sure how this works. Maybe that's a reason for hope. Maybe it'll turn out that all this Wall Street stuff is just less important than we think it is.Wall Street's on fire. We know that. The question is what else is flammable, and how close is it to the blaze? Housing is, as Ryan Avent says, the common denominator here. And the housing numbers are grim. But beyond them, we're not yet seeing numbers from the main economy that are anywhere near as bad as what we're seeing in the stock market. Unemployment hasn't rocketed up, commodity prices aren't in the stratosphere, consumer spending hasn't plummeted, wages aren't in an accelerating decline. Now, maybe all those things will happen, and they're simply lagging indicators. They'll certainly happen if the news out of Wall Street, which gets disproportionate coverage in the press, freaks out the average American, and creates a fear-based downturn. But for now, we know all this is bad, but it's very hard to answer the questions of "how bad," and "for whom?"
