The case for optimism

In 2004, Paul Kasriel fired a shot across the bow of American optimism. The soaring housing market had crossed into the danger zone, he warned. Prices were rising far faster than people’s ability to pay, and a collapse was all but inevitable. Others had raised fears about the emerging housing bubble too, but Kasriel, an economist with the Northern Trust Company in Chicago, was one of the few to fully grasp the threat posed to the economy. Banks were heavily exposed to residential mortgages. A plunge in the price of homes would infect the financial system, he predicted, and from there it would spread to the wider economy, sending it spiralling into a deep and punishing recession. As we all know by now, few wanted to hear what he was saying. Officials in Washington clung to the myth, widely held at the time, that U.S. house prices never fall. Pundits scoffed at Kasriel’s dire predictions. “I was the skunk at the garden party,” he says.

Fast forward to today. Everything Paul Kasriel envisioned has come true, and then some. House prices are in free fall the world over. Investor portfolios have been decimated, leaving people suddenly feeling poorer. America’s biggest banks have failed or are wards of the state. GM teeters on the edge of bankruptcy, as do whole countries. Here in Canada we think of ourselves as better off, but our stock market has plunged, commodity prices have dropped and the housing market is suffering. And every month brings another round of brutal job losses on both sides of the border. So what does Kasriel make of this grim situation? “I’m actually feeling cautiously optimistic.”

That someone with such a knack for spotting serious trouble instead sees signs of hope is remarkable. Every day the airwaves, blogs and newspapers are filled with alarming forecasts from economists and financial experts. Time and again, we are told the world is headed for another Great Depression. Some argue we’re already there. And still others have taken doom-casting to the next level, predicting global strife as the logical conclusion to the downturn. Historian Niall Ferguson recently proclaimed, “There will be blood . . . It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme.” One newspaper columnist went so far as to ask, “Will this recession lead to World War III?”

In the opinion of Kasriel and other more level-headed observers, what’s really needed now, frankly, is for everyone to take a deep breath. This isn’t another Great Depression. There won’t be hobos riding the rails or huge lineups at soup kitchens. In fact, for all the problems facing the economy, some experts are making a cautious case for optimism. There’s a growing feeling that the economy could find its footing far sooner than many are expecting, a result of how dramatic the declines have been as well as the response by central bankers and governments around the world. This isn’t to say the economy is going to immediately pull out of its downward descent, or that the Dow will magically return to the levels it was at before the crisis. But it’s enough for Kasriel to begin to revise his outlook. “I’m not a raving optimist, but there are things I see that give me some encouragement,” he says.

For Canadians worried about where our economy is headed, it all comes down to how quickly the U.S. can recover. With our extensive trade ties, Canada is deeply invested in America’s economy; any signs it’s improving will give a strong hint as to when Canada will pull out of its recession.

Paul Kasriel’s change of heart is one positive sign. So might be the fact that few prognosticators share his confidence at the moment. Maybe it’s encouraging that, just like in 2004, everyone is dismissing his more upbeat view. In the same way most forecasters were blindly optimistic three to four years ago, many of that same group now refuse to see anything but terrible times ahead. “When the preponderance of data is one way or the other, it is psychologically difficult to have a counter-trend view,” Kasriel says. “This is why most economists are useless. The same ones that missed the downturn are probably going to miss the upturn.”

It can be hard to be optimistic when you consider who’s in the doom and gloom camp. Stephen Jarislowsky, 83, is one of Canada’s most respected investors. As the founder and chairman of Montreal-based fund company Jarislowsky Fraser Ltd., he amassed a fortune estimated at $1.4 billion by making shrewd bets on companies when they were out of favour. But when he looks at the situation today, he fears the worst. “The Great Depression is the best comparison to what we’re going through now,” he says. “Anyone who thinks less is fooling themselves.”

Jarislowsky, unlike so many other market commentators today, actually lived through that financial crisis as a young boy in Holland during the 1930s. “I remember a whole bunch of poor people walking around the streets selling anything they could, like peanuts, hoping that somebody would buy out of semi-charity,” he says. Does he think the economy will get that bad again for individuals? “The way things are going now, we’re going to get there in a handbasket because the government is totally incapable of handling it.”