It's Not a Recession, It's Reality

The article I am linking here compares our present economic demise to what happened in Japan in the 1990s. Japan suffered 15 years of real estate declines and over a decade of stock losses. It just started to recover a few years ago when the current recession hit it as well.

Here is one key paragraph in the article which comes early in the read:

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

I hate beating this nationalization drum so much but at some point someone important may pay attention. The second paragraph of this article to get my attention is that the U.S. seems to be in a similar situation:

More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.

And as big as you think the current plan is in the U.S., those who studied Japan think it is "timid." We cannot, however, afford anything else.

And here are a couple of key paragraphs. Japan tried what we are trying and it worked so (not) well. Oh well, go figure?

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

Overall, what Japan tried and we are trying is too comparable for comfort.

Here folks I will say again what I have been saying for a long time: we are in a very serious correction. I say correction as I truly believe we are righting ourselves. I say correction also because, as sure as hell, things were not right in 2007, so where we are going is a better place. We, as a people, were spending well beyond our means, and I mean WELL beyond our means. Our major financial institutions developed instruments that generate great wealth - for them - that allowed us to spend beyond our means. This period was doomed to failure and unfortunately got so severe that it is incredibly difficult for us to face.

My take is that we should do as little as reasonably possible and let the economy correct itself. I am not traditionally an extreme free market type of person. In a period of economic growth, especially great growth like we had leading up to 2007-2008, I am highly suspect that the market it operating properly. Moreover, I am a firm believer that capitalism and Karl Marx, in his Communist Manifesto, share the same delusion, which is believing in the ultimate good in human nature; some (many) people, including some in power, irrationally seek short term personal gain over long term rationality.

Despite not being the biggest fan of a "free" market economy (because some prudent level of government checks and balances is needed), I am a big fan of the economy correcting itself mostly on its own. We need backstops to help the victims of the correction, but in the end trying to stop it is foolish. Property and other assets will revert, and probably overshoot, the mean (the reality) on their values. We at best can prolong this happening but cannot prevent it, so in my book it is best just to let it happen, put it behind us and get on with it.

The same is true with other businesses. U.S. consumers for quite a while have been spending well more than they make and can afford. Their homes were their piggy-banks (I am among them) and their consumption seemed nearly limitless. American businesses added new retailers, outlets, malls, etc. to meet this increasing (false) demand. Now the demand is gone, so it is no surprise that so many businesses are closing down.

And here my friends is the most important thing I will ever tell you! Way too many people think the demand has just been reduced for a period of time. They believe this is a recession and things will eventually, if not soon, return to normal and the consumption will resume. Politicians are at the top of this list. What they fail to realize is that the last five to ten years were not normal. They were abnormal. Spending beyond our means is not the historic mean or sustainable. And so we face a new reality. A reality that is - hopefully - here to stay. It is in a way painful, but the sooner we realize it and embrace it the better.

We have house prices returning to reality. We have consumption returning to reality. We have many sectors returning to reality. Some would call it mean, but for this post I am calling it reality. And reality is undoubtedly an economy somewhat poorer and more deprived than we are used to. Less pay, fewer benefits, fewer jobs, fewer services and the like. We face a society with less and fewer on many fronts. What the government really needs to do is pare down and adjust for this and not try to artificially get us back to our foolish ways.

I posted a week or two ago on how families are coping in many respects for the better. Shopping trips, dinners out and movies are being replaced by dinners at home, game nights with neighbors and conservation. Buying is being replaced by barter. Families are moving in together. People are helping other people as best they can. The reality to which this recession/depression is forcing us is in some respects a better reality. This is not to say that my heart does not go out to those without jobs, benefits, food, heat or the like. It is upon those that I think the billions of government support needs to be spent; not the financial clueless that brought us here. I for one hope for a better, simpler tomorrow. My biggest fear at the moment is that the government will do so many stupid things in trying to stop a correction - stopping an adjustment to reality - that we will be totally screwed for a decade or two. Let's hope not.

Disclosures: None.

Comments

[know nothing:]

If it's fact, it's not lying!

Feb 15 10:24 AM

[Prudent Man...:]

How fast they forget the "Japanese Miracle" of the seventies and eighties. Obama better learn that his "ratings honeymoon" will be just as ephemeral as this economy is now his as he got his confiscatory bill.. He had all of the answers during the campaign and now he, like Geithner who just had to get appointed at Treasury quickly regardless of his tax fraud, had all the answers but are now proven they are empty suits with oratorical skills - a dangerous combo.

Never had I heard Bush whine about the recession and terrorism problems he inherited from horny Bill, who put his sexual appetites above National Security!

As long as government crowds out the private sector for money and awards incompetence this economy will stink. Why pay your bills? Why buy a car when Obama preaches you may not have a job next week?Why expand plant and equipment when the Administration preaches Depression? Why invest in a country that has a Socialistic President and Congress? Why get health insurance when the government will pay your bills?

Because of the greed of Capitalism, with their monopolistic, too big to fail mantra are we going to allow our Free Enterprise System to be destroyed by the Socialists now controlling confiscatory politics?

Congressional Term Limits are long overdue. Pass the word and support (use your browser) those who are taking action to get legislation passed on Congressional Term Limits.

You, your children and/or your grandchildren will have to pay the price of the Disaster on the Potomac we are seeing now. I you irresponsibly don't want to stop it who should?

Feb 15 10:33 AM

[LostJedi:]

How much did A-Rod get paid to play?

Feb 15 11:02 AM

[Craig Brown:]

I think that if you look at AIG, Fannie Mae, Freddie Mac and the like you will find the Bush Administration - the bastion of laissez faire economic policy - was ironically one of the most Socialistic administrations we have ever had.


On Feb 15 10:33 AM PrudentMan, CFA wrote:

> How fast they forget the "Japanese Miracle" of the seventies and
> eighties. Obama better learn that his "ratings honeymoon" will be
> just as ephemeral as this economy is now his as he got his confiscatory
> bill.. He had all of the answers during the campaign and now he,
> like Geithner who just had to get appointed at Treasury quickly regardless
> of his tax fraud, had all the answers but are now proven they are
> empty suits with oratorical skills - a dangerous combo.
>
> Never had I heard Bush whine about the recession and terrorism problems
> he inherited from horny Bill, who put his sexual appetites above
> National Security!
>
> As long as government crowds out the private sector for money and
> awards incompetence this economy will stink. Why pay your bills?
> Why buy a car when Obama preaches you may not have a job next week?Why
> expand plant and equipment when the Administration preaches Depression?
> Why invest in a country that has a Socialistic President and Congress?
> Why get health insurance when the government will pay your bills?
>
>
> Because of the greed of Capitalism, with their monopolistic, too
> big to fail mantra are we going to allow our Free Enterprise System
> to be destroyed by the Socialists now controlling confiscatory politics?
>
>
> Congressional Term Limits are long overdue. Pass the word and support
> (use your browser) those who are taking action to get legislation
> passed on Congressional Term Limits.
>
> You, your children and/or your grandchildren will have to pay the
> price of the Disaster on the Potomac we are seeing now. I you irresponsibly
> don't want to stop it who should?

Feb 15 11:28 AM

[Joyful Alte...:]

Those wonderful, good-old-days "dinners at home" you recommend means somebody in the home has to cook and serve them and somebody has to shop for (or grow!) the ingredients and somebody has to clean up afterwards and wash the dishes.

Are you subtly advocating a return to single-earner families?

Feb 15 11:33 AM

[Craig Brown:]

That is not what I was intending to suggest. Even two-earner families are resorting to eating at home to save money. In any event, the economy is leading to a host of single-earner and no-earner households whether we like it or not.

Feb 15 11:40 AM

[anarchist:]

IMHO the US is now and will be in the foreseeable future a consumer driven economy, not good but it's reality. So how do we get money into the pocket of those who will spend?
1. A single payer National Health plan
2. suspend or reduce withholding taxes ( a couple of $trillion will make a lot of Social Security payments) until the economy looks healthier.
3. Raise and extend unemployment benefits.
4. Increase Social Security benefits
These four items would put money immediately into the hands of those who need it and will spend it. They also are of immense help to businesses, easing the burden of Health Care, matching SS payments etc.

Feb 15 12:14 PM

[lorddarley:]

Whenever I read the prase "lost decade", I wonder what was "lost" in the Japan of the '90's.

Clearly, Japanese stock prices decreased, and stayed low. However, the average Japanese citizen (aka/ Main Street) does not seem to have suffered.

Worthwhile or not, Japanese jobs were preserved and social dislocation was kept at a minimum after a bubble founded on the myth that the Japanese would rule the world.

During the "lost" '90's, Japanese industry continued to produce profitable exports and to establish profitable beachheads in their client countries. Although there are unsolved problems in Japan today, its currency is the world's safe haven.

My own views on this are not well-formed, so please don't blitz me with a bunch of "nays" for thinking the unthinkable. Was the decade of the '90's really lost to Japan citizens, or just to stockmarket speculators?

We live in interesting times. We have been taking social stability for granted. The Japanese of the '90's took no chances, and prioritized stability over the stock market. That might be the choice for our upcoming lost decade.

LordD

Feb 15 01:03 PM

[henarl:]

The government decision makers (Congress and the Administration) will continue to make populist proclamations and rants, all the while acting in favor of those who further their financial and political ends. The status quo has benefited the elite class and they will do their best to prolong it. They will be successful in the short to medium term but, long term, the empire will fall just as all empires before it have. What will replace it remains to be seen.

Feb 15 01:07 PM

[User 357446:]

When we came to the US ten years ago this was a great country with a great president. Then GWB became president and we went from a beloved and peaceful country to a warmonger and bully ( at least that is how we treat our allies nowadays ).
If that wasn't enough the GOP ruined the budget ( Bill had a surplus ) and the economy and now the same loosers dare to attack Obama, who is probably the US last hope.
Here is what we should do.
1.Instead of nationalize banks and automakers etc. we should confiscate the money of the manipulators on Wall Street like Goldman Sachs, Fleckenstein etc. , who made trillions of dollars by shorten the market and driving it down, forcing companies into bankruptcy or at least into massiv layoffs.
2. Lower taxes for low and mid income by increasing tax exemptions and credits and increase the taxes for higher incomes. Esp. the exemptions for property tax has to be higher. Get rid of the cap for SS.
3. Make Health Care mandatory for everybody, not with Universal Care alone but as an alternative to the privat sector. The results will be overwhelming. In Germany you can choose between the two and over 90% are in the national healthcare, because its cheaper, as good as the private sector and you are covered no matter what. The privat sector is always looking to avoid paying something and using any dirty trick, as seen in the rainmaker.
4. I don't think we should increase welfare etc. to an Europe-Level, but it should be better than it is right now.

Feb 15 01:50 PM

[jksisco:]

Shouldn't our Governments (FED,STATE,LOCAL,) also have to live in the new "reality". To put more money into circulation in the most efficient manner would be to suspend payroll deductions(since the "stimulus" is just tax money) that would certainly lead to more savings and investment in the immediate future, not 2-3 years down the road, if ever, and would also force the government to spend less on unnecessary programs. Instead we will enter a period of more spending that will beget more spending which will increase taxes and create less "real" jobs (non-government). I don't buy the governments kool-aid on this economic situation at all, it's bad policy and will just expand the welfare state and crush private investment. If the Banks are insolvent then they need to fail, a little pain now is better than a lot of pain later. Rationed spending or directed spending is just too political in nature and only rewards those that are able to curry favor, hardly democratic, (the $8 billion allocated to a high speed rail line between LA and Vegas is just one example of political earmarks), people should be entitled to spend their earned money on whatever they see fit without government direction or manipulation. A $400 tax rebate might come in handy right now,but, just like a Credit Card not payed back immediately, costs you several times what you originally borrowed. A lender nor a debtor be is the policy we should be following right now and in the future as well.

Feb 15 02:24 PM

[jksisco:]

You have every right to your opinion and maybe that's why you moved here. But before you make unsubstantiated claims maybe you should do some research. If universal healthcare is such a great system, how come everything I read about it says just the opposite. Government intervention has lead to higher costs involved with healthcare and is the primary reason for most of the high cost and has resulted in fewer people having access. The last thing we need in this country is big government socialism like you were used to. If you're from Germany, I understand that government spending is something like 50-60% of GNP. That is totally unacceptable to me and is the exact reason I don't vote for Democrats and why I won't vote for any Republicans that profess the same ideologies. Socialism sucks and so does big government. Don't offer me your kool-aid wrapped in socialism, I will not partake, thank you very much.


On Feb 15 01:50 PM User 357446 wrote:

> When we came to the US ten years ago this was a great country with
> a great president. Then GWB became president and we went from a beloved
> and peaceful country to a warmonger and bully ( at least that is
> how we treat our allies nowadays ).
> If that wasn't enough the GOP ruined the budget ( Bill had a surplus
> ) and the economy and now the same loosers dare to attack Obama,
> who is probably the US last hope.
> Here is what we should do.
> 1.Instead of nationalize banks and automakers etc. we should confiscate
> the money of the manipulators on Wall Street like Goldman Sachs,
> Fleckenstein etc. , who made trillions of dollars by shorten the
> market and driving it down, forcing companies into bankruptcy or
> at least into massiv layoffs.
> 2. Lower taxes for low and mid income by increasing tax exemptions
> and credits and increase the taxes for higher incomes. Esp. the exemptions
> for property tax has to be higher. Get rid of the cap for SS.

>
> 3. Make Health Care mandatory for everybody, not with Universal Care
> alone but as an alternative to the privat sector. The results will
> be overwhelming. In Germany you can choose between the two and over
> 90% are in the national healthcare, because its cheaper, as good
> as the private sector and you are covered no matter what. The privat
> sector is always looking to avoid paying something and using any
> dirty trick, as seen in the rainmaker.
> 4. I don't think we should increase welfare etc. to an Europe-Level,
> but it should be better than it is right now.

Feb 15 02:48 PM

[User 341167:]

I think we are in denial about the true cause of our current problems and until we face up to the reality that we have TOO MUCH GOVERNMENT that we can no longer afford we won't see the end of our troubles. We have thousands of gov't programs devised 100 yrs. ago to solve 100 yr. old problems that still thrive today. They are created and they never go away. Do we really need hundreds ( thousands?) of agricultural agents across the country teaching people how to garden? How about going to the library and checking out a book instead. This is just one example. Not only do gov'ts usurp resources that could better be used in the private sector but on top of that they create bad laws that exasperate the problems. Gov't meddling in markets has brought us to where we are today! Personally I don't blame bankers for trying to rid themselves of mortgages they knew couldn't be repayed. I blame the congressmen that created the idiotic lending policies in the first place. Lets face up to reality and attack the real problem ....out of control gov't spending.

Feb 15 03:38 PM

[danf:]

The government taxes and punishes savings and investment. Years of 1% yields on savings accounts while real inflation and taxes consumed the value of savings led people to take on more risk or to simply not save ( a form of risk taking in itself). People did what government was signaling them to do - borrow and spend. And now, government is hoping to engineer inflation to wash away debt, which provides another incentive to get out of cash - to spend rather than save...but, we may find that the government has exhausted it's ability to take. The markets may now demand higher interest to fund debt. The voting baby boomers may finally wake up to self interest and the threat inflation poses to their future and turn against the governments desire to inflate. These huge spending spasms from the feds may be good in that it will finally exhaust their credit standing. If we can just avoid a collapse of our currency we may be witnessing the self-destruction of the real vampires in our society

Feb 15 06:00 PM

[Dave Wrixon:]

Tip of the Iceberg I fear.

It will take nearly a decade for the US to formulate the political resolve to address the problem properly.

And even then, things are never going back to the way they were.


On Feb 15 11:28 AM Craig Brown wrote:

> I think that if you look at AIG, Fannie Mae, Freddie Mac and the
> like you will find the Bush Administration - the bastion of laissez
> faire economic policy - was ironically one of the most Socialistic
> administrations we have ever had.
>
>
> On Feb 15 10:33 AM PrudentMan, CFA wrote:

Feb 15 06:04 PM

[toobad41:]

Craig,
Kudos. You hit the nail on the head for the most part. But you left out "Greed". This has been the greatest driving force for the past several years. It was too good to last. We've come back to reality as you have stated. The bubbles that greed generated have finally popped.

Feb 15 07:00 PM

[MarkitWacha:]

Wow. Well said. This is not the America the founders had in mind.


On Feb 15 03:38 PM User 341167 wrote:

> I think we are in denial about the true cause of our current problems
> and until we face up to the reality that we have TOO MUCH GOVERNMENT
> that we can no longer afford we won't see the end of our troubles.
> We have thousands of gov't programs devised 100 yrs. ago to solve
> 100 yr. old problems that still thrive today. They are created and
> they never go away. Do we really need hundreds ( thousands?) of agricultural
> agents across the country teaching people how to garden? How about
> going to the library and checking out a book instead. This is just
> one example. Not only do gov'ts usurp resources that could better
> be used in the private sector but on top of that they create bad
> laws that exasperate the problems. Gov't meddling in markets has
> brought us to where we are today! Personally I don't blame bankers
> for trying to rid themselves of mortgages they knew couldn't be repayed.
> I blame the congressmen that created the idiotic lending policies
> in the first place. Lets face up to reality and attack the real problem
> ....out of control gov't spending.

Feb 15 09:00 PM

[MarkitWacha:]

I support congressional term limits. We have a lot of lawyers creating bills about new economies they didn't study in college 25 years ago. Cut them loose, so that they can try to become productive in the real world.

I'm specifically talking about Chris Dodd, Barney Frank, and Charles Schumer. These guys exacerbated the bubble when they supported looser credit restrictions for home loans in the '90s.

Shame on the advisors for these people, too. What were they smoking back then? Take this one step further... Shame on the people who elected these guys and kept them elected. Perhaps what we're seeing is a failure caused by democracy as much as anything. The voting constituents are as much to blame as anyone. This reminds me so much of the history of the fall of Rome that it's scary.

On Feb 15 03:38 PM User 341167 wrote:

> I think we are in denial about the true cause of our current problems
> and until we face up to the reality that we have TOO MUCH GOVERNMENT
> that we can no longer afford we won't see the end of our troubles.
> We have thousands of gov't programs devised 100 yrs. ago to solve
> 100 yr. old problems that still thrive today. They are created and
> they never go away. Do we really need hundreds ( thousands?) of agricultural
> agents across the country teaching people how to garden? How about
> going to the library and checking out a book instead. This is just
> one example. Not only do gov'ts usurp resources that could better
> be used in the private sector but on top of that they create bad
> laws that exasperate the problems. Gov't meddling in markets has
> brought us to where we are today! Personally I don't blame bankers
> for trying to rid themselves of mortgages they knew couldn't be repayed.
> I blame the congressmen that created the idiotic lending policies
> in the first place. Lets face up to reality and attack the real problem
> ....out of control gov't spending.

Feb 15 09:11 PM

[Moon Kil Woong:]

Like Japan, the longer the US supports high prices through spending and low interest rates the worse it will be for the US. For an economic correction to run its course supply and demand must rebalance. That means lower prices and usually a drop off in oversupply.

What the US is trying to do is to create a recovery to an economic cycle without lower prices and a drop in consumption. That is patently ridiculous.

Keeping prices up means less consumption. Supporting industries which have overproduction means even more oversupply and economic inefficiency. Running bigger and bigger debts leaves the country with less economic security and it's people with less wealth and more taxes in the longer term. And supporting an economy with the status quo with such huge trade imbalances only encourages even worse imbalances to come in the future. In short, we are not solving any problems here. We are creating them.

Has anyone ever studied basic supply and demand graphs? Or is that too arcane for anyone to grasp any longer.

Feb 15 10:14 PM

[max12345:]

There seems to be an unstated assumption out there that the Japanese
didn't act quickly enough (and were "ineffectual") and that if only they had acted "boldly" they wouldn't have had to suffer 10 -15 years of very low growth and etc. etc. But the Japanese Yen has NOT devalued by 50% of its former value due to inflation and the Japanese crisis is now mostly over and resolved...(where it not for this other one right on its heels). Can we be so sure that "bold" action might not lead to a very "bold screw-up" and hyper-inflation? Maybe moving cautiously and incrementally (waiting for partial results to come in first) and accepting a longer period for whatever recovery is going to take place, is instead the wiser thing to do? " Instant gratification ideology" can lead to instant crashes and downfalls (as already has just happened) We allowed unscrupulous, greedy and extremely "clever" people (the "best and the brightest") to enter into all sorts of derivatives and "derivatives of derivatives" and "derivatives of derivatives of derivatives" deals, as get rich (very) quick schemes. Instead of trying to make money the old fashioned way by actually creating some value. Maybe now we will just have to pay the piper and start eating rice for a while instead of Big Macs or Christmas Turkeys. (it can only help to get rid of another major national problem which is the grotesque obesity that has "befallen" us)
The U.S.A. was a great country once and can become a great country once again. But there is a lot of slow work to do.

Feb 16 04:56 AM