I don’t think I know of a recession that was caused by the consumer. Recessions are caused by things that happen in the business sector, and because the business sector has to meet shareholders’ expectations, when problems arise, it has to address them quickly. That’s what we are seeing in the construction business. Overall, profits are strong. If we have a recession now, it would be the first one since the 1850s to happen when corporate profits were at record levels.

THE PARTICIPANTS
JAMES GLASSMAN  managing director and senior policy strategist at JPMorgan Chase & Co.	RICHARD BOOKSTABER  portfolio manager for the FrontPoint Quantitative Fund, a quantitatively driven long-short equity hedge fund, and the former head of risk management at both Salomon Brothers and Morgan Stanley.	NOURIEL ROUBINI  professor of economics and international business at New York University’s Stern School of Business, and chairman of Roubini Global Economics, a macroeconomic analysis and consulting firm.	ETHAN BERMAN CEO of the RiskMetrics Group, a leading financial risk analytics firm. (Photograph by Thomas Hart Shelby.)

There is the question of why businesses have been so cautious about spending, which I don’t think is much of a mystery. I think we are in a time of economic renaissance. The world is opening up. There are new alternatives in Asia, and we just don’t know what to do yet. It takes time to get acclimated to the way business is done in China, India and Indonesia. People are trying to figure out how to manage globalization best. If you are an investor, there are risks ahead, because you don’t know how much it takes to make that adjustment. But frankly, the low corporate investment levels in a world that is seeing a second industrial revolution taking place across Asia—which is, by the way, what is driving the U.S. trade deficit—makes this a very interesting time.

Worth: Nouriel has said the large proportion of new job growth attributable to the housing sector in the last few years is out of line with historical levels. If the housing market does turn down, wouldn’t it have an outsized effect on the economy through employment?

Glassman: A lot of this has happened already. Housing job creation has disappeared. It was generating a lot of jobs, and it would have a negative effect if economic conditions were the same as they were in the past. They aren’t. When the frenzy dies out in one place, you get relief somewhere else.

The consumer has benefited from rising balance sheets and rising asset prices in stocks and property. That is why people didn’t feel the need to save, but that is changing. The consumer is no longer benefiting from balance sheet windfalls, and we are going to start to see consumer behavior getting more in line. What that means is that you are going to get sectors like housing becoming more balanced.

In the background, interest rates are adjusting. The market has been on to this for a while. Bond markets are indicating that we have a new natural level of interest rates, which seems likely to be lower. The market is trying to find a new equilibrium. You don’t have housing driving the market, but something else will step in.