03/28/2008 02:45 am ET Updated May 25, 2011

Recession Fears: Worry Like It's 1989

The news keeps coming, each item worse than the one before. New-home sales fall 26 percent nationwide; the U.S. economy loses 17,000 jobs in January; Wall Street write-downs cross the $100 billion mark. Sure, the technical definition of a recession is two or more consecutive quarters of negative growth, but with headlines like that, and last week's word that fourth-quarter GDP was up an anemic 0.6 percent (in other words, all but down), does anyone really believe that the U.S. economy is not on the precipice, or already over the edge? The prospect of a national economic downturn raises all sorts of troubling issues, of course. But from an entirely parochial point of view, one question stands out: What's going to happen to New York?

Perhaps the best way to answer that is to look at what happened the last time the city went into a prolonged funk. Not the 2000 NASDAQ crash and the post-9/11 malaise, both of which, bad as they were, came and went comparatively quickly. We're talking about an all-out, multiyear five-borough slump, one which your average 30-year-old Wall Street analyst, say, is unlikely to even remember: the sad stretch from 1989 to 1992, when the median home price in Manhattan dropped by more than a quarter, construction declined by a third, and the city lost one-tenth of its jobs.

It all started, of course, on Wall Street. On Black Monday, October 19, 1987, the Dow Jones index, for reasons still being debated, fell 508 points, almost a quarter of its total. (The current equivalent, for comparison's sake, would be a 3,200-point loss on one day.) The drop turned out to be a "black swan event," a weirdly poetic economist's term meaning, basically, a fluke (though few people remember it, the Dow still eked out a positive finish for the year). Still, the hiccup seemed to foretell the instability to come. Over the next two years, with the economy perceived to be overheating, the Fed repeatedly jacked up interest rates, which made bonds and T-bills sexier than stocks, which triggered an epidemic of unscrupulous bond peddling, which further destabilized the market--leading to a slowdown. (If that all sounds disturbingly like the recent subprime-debt mess, well, that's because it is. But more on that later.) And a slowdown on Wall Street, which provides over 20 percent of the city's cash income, spells a slowdown for New York.

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