Economist predicts slow recovery for stock prices

The economy might bounce back, but it'll take longer for the stock market to rebound, writes economist Casey Mulligan in the Economix blog. He's skeptical that stock prices will soon return to 2007 levels.

The reason? The housing bubble has now burst.

Here's his thinking: The housing boom gobbled up a lot of financing, which made it harder for new companies to find enough financing to get off the ground.

That was great for incumbent companies in the stock market, because the lack of new competition made them more valuable to investors. But now, the housing boom is over.

So as the economy recovers, investment will start to pick up in new and expanding companies, Mulligan writes. That will just keep a lid on the earnings of established companies already on the market.

I'm not so sure about Mulligan's theory. It's tied to the idea that new competition is bad for existing companies, but the logic isn't that simple. On one hand, as an Economix commenter writes, wouldn't that ultimately increase net productivity? And wouldn't stock prices be better off if new companies went public?

Mulligan also seems to think that freed-up financing would only help new companies to the detriment of existing companies. I can't follow that conclusion, either.