I skim a number of on-line news and commentary sites every morning. This morning (February 27) I found a very worthwhile Op Ed on The Huffington Post by David Paul (David Paul: Will we Learn from this Recession that There are No New Paradigms?).
David reviews some interesting history about such things as increased mental illness during recessions, past proclamations of the end of the business cycle and Federal Reserve actions over the past 25 years to lessen economic contractions.
There are a number of quotes I’d like to highlight. The first of these:
“Economic cycles are part of life, like the seasons. Families need to cut back and save as the downturn approaches. During the downturn, workers need to be patient and improve their job skills. And, like the seasons, this is normal, and like a hard winter, this too will pass.”
This is a concept totally foreign to most Americans under 50. They are all two or more generations removed from having parents who were teens or adults during the Great Depression. Saving (except for retirement plans for some of them) is largely a seldom considered, to say nothing of practiced, strategy. Someone who is 40 today was 13 when we came out of the last severe recession in 1982. We are in totally unfamiliar territory for half (or more) of our populace.
This lack of historical perspective has defined what is currently happening:
“Over the past months, our country has responded to the recession with fear and pessimism that has been largely unchecked by an historical perspective on economic cycles.”
David states the obvious, although it is not often heard in current commentary:
“Looking back, it is apparent that the depth and severity of our current economic downturn is due in large measure to the success of the Federal Reserve in forestalling significant periods of economic downturn for much of the past twenty-five years. We forgot--as individuals, as families and as businesses--that the economy is cyclical.”
In other words, the business cycle has a purpose. Moderating its impact through fiscal and monetary policy may be possible, but eliminating the cycle cannot be done in a capitalist system. Attempts to eliminate the business cycle simply delay the day of reckoning and exaggerates the eventual correction. Our most recent example is the extended period of 1% Fed Funds rate after the 2001-02 recession, which further fueled an already distended bubble in debt, derivatives and housing after 2003. In hindsight, we have to wonder what would have happened if the Fed had started raising rates in 2003, rather than continuing to cut rates and not raise rates until 2004.
We can even extend this gedanken experiment even further. How would things look today if the Fed had stopped cutting at 2% (or even higher) in late 2002 and waited to judge results from the drastic rate cuts over the previous 18 months from a high of 6.25%? My recollection of the emphasis at that time was that the Fed would cut rates as much as possible without sparking inflation. Unfortunately, they were watching the CPI and not debt inflation. I can remember that Greenspan was celebrated as a “magician”. Unfortunately, we forgot to realize at that time that the specialty of a magician is illusion.
David discusses the value of recessions to the economy:
“…we lost the value of periodic recessions as a cleansing and humbling time. For individuals and families, recessions are a time to take stock, to cut back on our materialist tendencies, to save, to pay down debts, to retool our skills. For businesses, recessions are a time to rethink strategy, to close marginal operations, and improve attention to costs and excess. For bankers, it is time to learn to write off bad debts and tighten up lending standards, and perhaps teach young associates the basic principle that when there are no profits, there are no bonuses.”
We have not had an economic housecleaning in almost 30 years. The brief and shallow recessions of 1990-91 and 2001-2 were “managed” by the “magician” Greenspan. We never got the needed “periodic recessions as a cleansing and humbling time.”
Pres. Obama says we must create jobs and get the economy growing again. Making such a statement is a political necessity. The president would be seriously remiss if he did not articulate a forward looking optimism. However, I would propose that the mission should be to take government action to prevent the onset of a deflationary spiral, but allow the necessary recessionary cleansing to occur. This is an extremely difficult task. It is much more difficult to prevent the metastasis of advanced cancer than it is to remove encapsulated tumors.