Alan Reynolds

Sudden drops in stock prices typically provoke more panic among reporters than among investors. When Dow industrials fell by 22.6 percent on October 19, 1987, the press was quickly filled with alarmed stories about an imminent "hard landing" that soon proved quite foolish. Some of us who did not buy those stories bought stocks and bonds at bargain prices.

The market's drop of about 3 percent on Tuesday was comparatively trivial and brief, yet it too provoked some overwrought reactions from the press, and from perpetual bears. In the latter camp, economist Nouriel Roubini said: "Today we had a meltdown in many stock markets. ... What happened today is consistent with my outlook for a U.S. hard landing this year."

But what about what happened on all those other days when stocks were soaring? Last October, Roubini said there was a 70 percent chance of a "severe recession" by now, as noted in my column "Recession Fairy Tales." Yet he now relies on the stock market's performance on a single day to rationalize a recession forecast that keeps being postponed.

What happened on that day was a rumor the Chinese government was planning to impose a new 20 percent capital gains tax on stocks. It is clear that this is what caused an 8.8 percent drop in Chinese stock prices on Tuesday, because there was a 4 percent rise the next day when that rumor was denied. Because Chinese entrepreneurs are major global investors, as well as major importers, that misperceived risk of a local tax shock affected many other markets in the world. To expect a "hard landing" in the United States from unconfirmed rumors about Chinese tax blunders, however, is quite a stretch.

U.S. reporters tried to pin the global market dip on homegrown issues. Some blamed a speech by Alan Greenspan, because he said, "While it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment." Recession is possible, in other words, but far from probable. Greenspan seemed strangely anxious that profit margins "have begun to stabilize," although they stabilized at a record high.


Alan Reynolds

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