The Benefits of This Recession

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.

Comments

[Tradememe:]

That is quite true. Recessions are normal economic conditions and they are part of the business cycles. If every time there is a slowdown, the Fed comes in and drops the interest rates so as to boost the economy. Then, we are just postponing the inevitable. And the recession will come back with a vengeance. This is the point where the boom stops being a boom and the bubble begins.

Feb 27 03:33 AM

[PROXIMO:]

By the time this economic collapse plays itself out, Greenspan's reputation will be radioactive.

Feb 27 04:17 AM

[Tom Armistead:]

Thinking of the economic cycle as analogous to the changing seasons is comforting: however, thinking of the economy as a cancer patient is less so.

Maybe best to forget the cancer analogy and stay with the seasons...

Feb 27 08:06 AM

[Hmm?!:]

True article, but a little fluffy

How about a list of the hard issues that need to be dealt with

>> Federal debt
>> illegal immigration
>> pork in every bill
>> overall integrity in washington

Feb 27 08:53 AM

[ArtfulDodger:]

The original intent of the Federal Reserve in 1913 was to keep a steady flow of money along with a steady interest rate to prevent panics, such as the 1907/08 one.

That intent was cast aside in the 1920s as the Fed became first a savior of the economy and then by slamming on the money brake a destroyer in the late `20s; the original intent was completely dumped in the early 70s.

So, here we are with the Fed at almost zero in an attempt to save a crashing economy and a debt-ridden banking system.

It might not be a bad idea for someone to remind the Congress of the original intent.

Feb 27 09:15 AM

[Ferdinand E...:]

For the life of me, I can't see anything good about cycles that include a recession of the type being experienced in many countries at the present time. Rather than "clensing and humbling", it is going to be humiliating for many persons, in one sense or another, and later if not sooner. Instead of bringing cancer into the discussion, a venereal disease might have been better. As they explained to us in graphic detail in the US army, some effort should be made - if possible - to stay away from those situations in which VD can be contracted.

Feb 27 09:42 AM

[John Petersen:]

Thanks for the reminder that pain is a better teacher than pleasure.

Feb 27 09:49 AM

[CautiousInv...:]

A strong case can be made that we intervened too quickly in arresting the contraction of 2001-2002 and that economic growth since 2002 was fueled largely through the combination of low interest rates and easy money.

A recession does serve useful purpose to the extent that enterprises operating at the margin are allowed to fail; inventories are brought into balnce; displaced workers are forced to acquire skill sets required to support forward looking frowth; and capital is reallocated to the most efficient uses.

The point being made by the author and the Huffington Post is that this process has been artificially forestalled, allowing the continuation of an economy with structural imbalances and in a state of disequilibrium.

The longer the inevitable and required adjustments are postponed, the more severe the process of economic house keeping.

Feb 27 09:58 AM

[HiSpeed:]

Excellent article.

Unfortunately the current administration's intention is to take advantage of the situation and transition the country to our new "leader's" socialist policies. Name one country that has excelled under socialism? How are all those unfunded mandates working out for California?

The US needs another Reagan!

Feb 27 10:09 AM

[Bull Run:]

With each recession, all the scam artists float to the surface. A little street cleaning for NY.

Feb 27 10:10 AM

[sunnsea:]

The difference between this period which is really a Depresson and a recession is that when we were a manufacturing country, goods would be produced and inventories accumullated resulting in an oversupply condition. Workers would be laid off. When the inventories worked through the same workers would be called back to the assembly line. White collar workers were rarely affected. This is the way it was from the 40s through 1970. Then things began to change as American plants were not upgraded, tax incentives for retooling were disallowed such as in the 80s and outsourcing began to be the norm. In its place grew an economy solely based on deception and swindling, trying to get average middle class people to part with the money at accelerating rates. Tax cuts for the super-rich and elimination of the 90% and 75% rates on the very highest incomes allowed them to speculate in stocks and real estate with only 35% taxable of very large and growing incomes based on speculation in both areas. This is the big difference and since there is nothing substantial to this economy of falsehoods and propaganda it was bound to collapse at some point. This is why this is not a recession. The last time this occurred was in the 1920s and this is why we are in a depression.

You are also overlooking the recessions of 1991-92 and 2001-2 which came to close to fitting the definition but which were propped up by Greenspan as we all know.

Feb 27 10:13 AM

[John Lounsbury:]

Ferdinand E. Banks - - -

I enjoy your caustic comments, even when I don't agree with them. I hope the negative ratings you seem to collect do not disuade you from continuing to offer your thoughts.

I agree that there is little good to see in the current world-wide recession (or depression?). My point in writing the article was that the pain we suffer now is the result of improper interference with the two previous recessions (1990-91 and 2001-2, especially the latter).

VD rather than cancer is also a good analogy. On reflection, I can see the merit of using both.

Thanks for commenting.

Feb 27 10:43 AM

[Green Eyes:]

I thought this was an excellent article sir. I couldn't agree more with this excerpt:

“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.

I am 26 years old and many people of my generation think that money comes from a tree in their parents back yards. Thankfully my parents taught me from day one the value of a dollar and taught me how to SAVE and will enstill those values in my son as well. Too many young people are more worried about thier clothing labels and cars that what is important. Perhaps this economic crisis will reset people back to what is important, and strip them of their vain tendencies.

Feb 27 10:49 AM

[John Lounsbury:]

To all readers - - -

The editors of SA changed the title to this article from the one submitted: "The Business Cycle Is Necessary". I had considered "Why Recessions Are Necessary" but chose the business cycle option.

The title change by the editors has changed the general tone I had intended for the article.

Feb 27 10:49 AM

[silver-bug:]

The Economy is like the seasons, if allowed to take it's natural process. But when you inject the economy with growth hormones and stimulants (financial engineering), then the Economy will eventually become terminally ill, thus, the analogy of the cancer.


On Feb 27 08:06 AM Tom Armistead wrote:

> Thinking of the economic cycle as analogous to the changing seasons
> is comforting: however, thinking of the economy as a cancer patient
> is less so.
>
> Maybe best to forget the cancer analogy and stay with the seasons...

Feb 27 10:56 AM

[sleepless_o...:]

Sunnsea - - -

I am uncertain what you are getting at when you write:

"You are also overlooking the recessions of 1991-92 and 2001-2 which came to close to fitting the definition but which were propped up by Greenspan as we all know."

The article states:

"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.”

I think you may have intended to make a point, but it is not apparent to me. Can you clarify?

On your thoughts about the current recession becoming a depression, it will take another year to determine if you might be right. If we do not have any positive change in GDP in the next four quarters, a depression is quite likely. There were four years of GDP decline in the Great Depression. It is too early to call this a depression after one quarter, even if that quarter is down a horrific amount.

Feb 27 11:01 AM

[User 365570:]

I think Mr. Lounsbury could have avoided the Chauncey Gardner tone of his article by simply drilling a little down to certain facts of the human condition. To wit: Capitalism requires entrepreneurs. Entrepreneurship requires exuberance. Exuberance inevitably leads to excess. Excess requires correction. The more outrageous the excess, the deeper the correction.

Of course, Mr. Paul is correct. We will get through this. We are Americans.


On Feb 27 10:49 AM John Lounsbury wrote:

> To all readers - - -
>
> The editors of SA changed the title to this article from the one
> submitted: "The Business Cycle Is Necessary". I had considered "Why
> Recessions Are Necessary" but chose the business cycle option.<br/>
>
> The title change by the editors has changed the general tone I had
> intended for the article.

Feb 27 11:06 AM

[Tony Petroski:]

Since we are all Keynesians now: Putting aside something for a rainy day when times are flush and then spending what was put aside when times are tough is the essence of Keynesianism. The problem is political. The political leadership always has the pedal to the metal all the time. Therefore the boom times boom larger and the down times are tougher because there is no surplus to draw on. If Keynesianism can't work politically, that is the same as saying Keynesianism can't work--and that is what I'm saying.

Feb 27 11:10 AM

[waf76:]

The fear and pessism young Americans are experiencing in regards to the market is how the government handles most situations. Take terrorism for example. We were beaten to submission to be scared of it when in reality its been a one off for us over the past decade. Fear is a favored tactic of a lot of governments over their own people. This recession can be looked at as 'economic terrorism'. Only the government can save us. Some even beg for it. We will continue to operate in boom-bust cycles as long as the government intervenes during every downturn further irritating the symptoms which is akin to the steroid scandal in baseball. We will have bigger numbers but artificially inflated so when we go down we go down harder...just like the high of a crackhead...

Feb 27 11:36 AM

[beenburnedt...:]

Is the statement, "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.", correct?

Or should it be 'not' prevent the onset of a deflationary sprial?

What specific items would you have the government not interfere with? Everything? Banking? Home prices?

Feb 27 11:47 AM

[happyeconomist:]

I think you need to be frank about the current situation. This is not your run of the mill (if there is any) recession, or downturn in the economic cycle. This is an economic depression, and it's global. Unfortunately there isn't any formal definition of a recession, but a 10% contraction in GDP is a good start. Guess what? We are almost there.

In a depression, normal business cycle law stops working. Unlike the depression of the 30's we've moved into a service, consumer spending run economy. Saving is fine, but it will take a very long time for incremental savings to turn into consumer spending. Personal assets will have to be shed first. The "cleansing" is very painful. And prolonged. Among the economist circles, we privately estimate this to last 3 to 4 more years before we see a real recovery starting to happen, never mind a bull market. Remember, the Depression of the 30*s lasted 12 years and only got kick started due to WWII. I hate to sound so pessimistic, but if we acknowledge the realities of what is really happening, the better we can plan and deal with it.

Feb 27 11:50 AM

[If U Say So:]

The full felt pain of a recession has the potential to alter our saving habits in good times. However, that potential hasn't been realized because we haven't been accepting the normal business cycle. We elect politicians who know the health of the economy is number one in the minds of Americans. Therefore, if elected while we are in a recession, the populist move is to get us out as fast as possible. If elected while in good times, the populist appeal is to extend the good times as long as possible. Populist appeal is steering our economic present and future. This is a recipe for disaster.

Feb 27 12:03 PM

[Eokram:]

I completely agree. When George H. W. Bush told everyone to "stay the course," and that the economic downturn was a natural part of the ups and downs of the economy, he was not re-elected for a second term. Politicians (both Dem and Repub) learned this lesson - that if there is even a little recession, the American people shout "It's the economy stupid" and fire you.

Feb 27 12:24 PM

[prudentinve...:]

The problem is that Greenspan was a populist star, who ran the fed based on popular demand for low interest, rather than focusing on sound, long-term economic fundamentals. There were always a few wise commentators arguing that the ultra-low rates are creating ruinous bubbles, but this inconvenient truth was being ignored by the vast majority of our mainstream commentators, politicians, and financial services pundits.

Inconvenient truths are, well, too inconvenient to acknowledge; but ignoring them for too long brings about dire consequences. True leaders are those who have the courage to face them and address them, but we are not seeing much of an improvement yet.

Feb 27 12:30 PM

[JohnL:]

--The editors of SA changed the title to this article from the one submitted: "The Business Cycle Is Necessary"--

I agree with the sentiment of the editors and much of the article: recessions have benefits. I disagree, however, that business cycles are necessary. Yes, "Capitalism requires entrepreneurs. Entrepreneurship requires exuberance. Exuberance inevitably leads to excess." But I think that while one guy is being exuberant, the guy down the street is doing badly and turning pessimistic. That is to say, in the aggregate of a global economy, there is an averaging out of emotions. Thus, emotions alone can't be the root cause of the business cycle.

I think a more logical cause for the business cycle is the changing price and availability of credit from the banking system. In that sense, "credit cycle" would be the preferred name for the phenomenon. Investors, as a group, get bullish on the prospect of expanding with cheap credit, only to have their hopes dashed, as a group, when rates go up, loans become scarce and commodity prices go up in relation to their output prices. Then, the recession entails the liquidation and redeployment of marginal investments that made sense when interest rates were low and business was expanding, but no longer make sense when they're not.

Feb 27 12:31 PM

[dw57:]

not sure this is a normal recession. since this one appears to be caused by big business doing extremely stupid things. just like they did before the great depression. this isn't about the business cycle at all. this is about how our country was sold a bill of goods that were claimed to be good for us. and how did we get sold keeping regular workers pay low and executives pay high? oh yeah it was competition in both cases. some how that make no sense. and that particular creed has been going on for 30 years now. and is a major reason for today's rolling disaster. if wages had kept up with inflation, consumer (aka workers) might not have resorted to credit to make up the difference. then there is deregulation of finance. you would have thought we learned our lesson from the great depression. but no we didn't. we redid almost exactly the same things that were the main cause of that.

Feb 27 12:38 PM

[Ricard:]

John Lounsbury,

Great perspective as usual. Seems we still have a bit farther to go.

"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."

Great quote.

Feb 27 12:47 PM

[Al-USA:]

Ok, who designed this economic model which requires insanity followed by collapse? I

t's the 21st century, surely we can sit down and come up with a better model that does not threaten Western Civilization every couple of generations.

I mean think about WWI, WWII, and god forbid, if the current "recession" leads to WWIII... You get the picture? Pure lunacy, in my opinion.

Feb 27 12:57 PM

[User 283977:]

Yes, economic cycles are a normal part of economic systems.

However, I don't believe providing mortgages to people that are not qualified with respect to their ability to service those loans represents sound economic policy. So why was it done? It was done to create Trillions of dollars of mortgage based derivatives rated AAA by captive rating agencies and sold as safe 6% return investments. The latter events define the creation of a speculative bubble. Another economic cycle that does not occur on a regular basis, but is dependent on the presence / absence of certain "trigger events" that signal the start and beginning of these types of destructive cycles.

I suggest there is ample evidence that indicates the "trigger event" in this situation involved a systematic reduction in prudent regulatory policies designed to safeguard the countries economic system against the rapacious behaviour of certain "Lords of the Economic System" _______, ________. (Fill in the blanks).

I believe that suggestions to the effect that the current economic downturn was predominantly due to an extended period of 1% Fed funds was a secondary factors in this unfolding disaster. I say predominantly because this was the only systematic "mechanism" mentioned in the synopsis.

I concur that normal recessionary periods are a good time for businesses to rethink strategy, and close marginal operations. However recessionary periods brought about by the development of what amounts to a colossal Ponzi scheme are different. These events are inherently destructive because wealth that was honestly created, and businesses that were honestly run, and peoples savings that were honestly earned have been effectively destroyed or fraudulently appropriated.

In this type of an economic downturn, the primary benefit appears to be the revival of a healthy scepticism with respect to the advisability of removing safe-guards and regulations designed to protect people from what amounts to fraudulent behaviour by some of our supposedly "TRUSTED" institutions. One of those trusted institutions is our Government which has totally failed in its responsibility to protect its citizens, and many of our countries industries from fraud on a gargantuan scale. Indeed, one of the primary results of this type of economic cycle is the destruction of TRUST. No economic system can work in the absence of trust. For example, should people trust US Treasuries?

I would hope the primary benefit of this type of Recession is recognition of the failure of the peoples Government in 1) providing regulations designed to protect its citizens and 2) the development of policies designed to implement large scale goals for our country. Another benefit would be the recognition of the inherent danger of our countries dependence on foreign energy supplies. Yet another benefit would be recognizing the dangers of outsourcing key aspects of a countries economy. The notion that our outsourced machinists, programmers, and other skilled labour positions can simply be re-trained to work in other jobs provided by companies like Wal-Mart is intellectually bankrupt because it fails to recognize that skilled labour positions of this nature are the engine of innovations. If you outsource manufacturing, you are never going to innovate / invent new manufacturing processes. Of course recognizing an issue like that does require management and government to see long term as opposed to managing everything by quarterly earning reports.

I suggest its insights along these lines that are the primary benefits associated with this type of recession. Opportunities are often recognized when systems fail.

Feb 27 01:03 PM

[CLH:]

Very good paper John. Few people understand capitalism. Our schools only teach socialism.

Capitalism corrects its own mistakes which is its beauty. Socialism has no method ot correction except war.

Feb 27 02:09 PM

[TinyTim:]

I challenge the assumption that business cycles are necessary. I agree that recessions involve creative destruction and that the easing of the last two slowdowns has magnified what we are going thru now.

IMHO business cycles are a result of fractional reserve banking.

Feb 27 02:54 PM

[Roman_Fiddler:]

I found this article very heartening. I think the cyclical nature can apply to many things - history, economics, growth, relationships, weather, the movement of planets, the ebb and flow of tides...much of nature. Whether we like it or not, applying artificial 'systems' for this metaphor of money are always going to be at the mercy of these cycles - they are innate in human behavior if nothing else. There are bound to be ups and downs.

Once upon a time we were agrarian - we knew there was a time to harvest, a time to reap and sow. We seem to have forgotten this. We need to learn that this cycle applies even to the artificial systems we try to impose upon our world.

I totally agree the task at hand for Obama is to 'take government action to prevent the onset of a deflationary spiral, but allow the necessary recessionary cleansing to occur.' I wish him every success, though it will be an almighty task.

Feb 27 03:01 PM

[Dave Wrixon:]

This perception is wrong. It is possible to minimize the destructive damage caused by the business cycle. The destruction and renewals can go no within a stable economic framework to take the economy forward continually and progressively.

But you have to do it right, and that is just about impossible with elected politicians who thrive on the day to day pulse of their own popularity. To be successful the economic models need to be finely tuned. The statistics need to accurate and honest. The intervention needs to be precise and unbiased.

When it comes to efficiency gains, the greatest returns will come from streamline and balancing government. The private sector has made huge strides to be more productive, even if on a global stage many of our industries remain uncompetitive. However, the biggest overhead in all countries and this includes our key competitors rests in the inefficiencies of Government. They cannot even rationalize what they attempt to achieve.

To give you an example of what I am talking about. The BBC is paid for by viewers through an annual license fee which is collected as a separate tax. It is also enforced by an army of TV detector van's. Hello!!! Nearly everyone these days has a television. Why go out of our way to accommodate that minuscule percentage of oddballs that do not. The obvious answer is make TV reception free but support public service broadcasting through general taxation. OK, thousands would lose their jobs, but are they really doing something that is useful to the nations economy or are they just dead weight our hard pressed exporters have to support in the their remuneration overheads?

Feb 27 03:02 PM

[JohnL:]

Dave Wrixon,

I agree with most everything you said, except for this comment: "The intervention needs to be precise and unbiased."

Inflation is inherently biased because it benefits those that get access to the newly printed money before prices rise, and it hurts everyone that must pay the higher prices. Debtors are favored over savers. Fiscal policy (spending) is biased because it always helps those on whom the money is spent or who get the contracts, far more than it helps others. And neither can be described as very precise. Unless you had another type of intervention in mind, I think you will be disappointed.

Feb 27 03:33 PM

[dlaw:]

Unfortunately, this adds up to yet more undisprovable blaming of everything and everyone but the people who SOLD the real estate bubble - what might be the biggest bubble in human history. This is by no means business as usual.

The "this is just the way things work" mentality is exactly what was used to sell people houses in 2005 and sell investors bogus motgage-backed securities up until the market folded and the marketers began to choke on their own fraud. This didn't happen because Alan Greenspan refused to let things "revert to the mean". This happened because people at trusted, regulated institutions used their position of trust to make trillions of dollars in bogus financial commitments for profit.

When people saved, they were saving in lies - money for nothing. When they spent at least they were getting stuff.

Feb 27 05:33 PM

[Steven Hansen:]

business cycles happen because people move in herds from one investment to another. the leaders of our economy are bankers who try to quantify our money movements and believe this is a perfect mechanism to control the economy.

we are paying the price for the poor choices our fed has made, our governments have made, and we have made.

we can argue forever if business cycles are necessary - but until we change our economic management system - they will continue to happen.

Feb 27 07:31 PM

[Philip7:]

The business cycle is basically a product of group psychology. You're right that excesses get wrung out of the system with a recession when people are suffering enough to change their behavior. The longer you go without a recession, the longer it takes to convince people to change their maladaptive behavior. And if you have abortive recessions like in 2001, it takes even longer to convince someone to change their behavior(if you give a rat a piece of cheese every time they push a lever, shortly after you stop rewarding them with a piece of cheese they stop pushing the lever. If, sometime you give them a piece of cheese when they push the lever and sometimes you don't, the rats will keep on pushing the lever for a lot longer after you've stopped rewarding them with the cheese.)
It's my impression that, while people have been changing their maladaptive behavior during this downturn, if the economy snapped back tomorrow they would go back to their old ways. I think the recession/depression needs to go on for another year before people's behavior is permanently changed.

Feb 28 09:44 AM

[jeerio:]

calling this a recession or a cycle is like calling a tsunami a wave. and while the 'depression' word has iconic status in our country's history, i don't think that accurately describes what's really happening. both terms generally refer to drops in amplitude and volume, with some aspects of the business horizon disappearing or being altered as a result of the entire process.

the complexities of the changes required to fix this version of a depression are daunting. we should be allowed to experience more frequent downturns and cycles that aren't exacerbated by either artifical manipulation, a la Greenspan, or ignorance, al la Bush. the source of all of this is the blind need for power pursued by both political parties. in that sense, the government used the financial system to buy votes to either retain or regain power.

these aspects of the problem make true resolution extremely difficult, and in many ways point towards the reasons that all previous civilizations that ruled the world lost it all, someway, somehow.

it's a sad thought, and perhaps none of us alive today will live long enough to see the end game, but this experience we are being shown is completely and absolutely due to the corrosive nature of power that is achieved through arrogance, greed and self-interests. and in that way, at least Obama understands the need for responsibility, humility and a return to more broader=based values that benefit more than the select few. whether he can pull it off is unknown, but i think the basic nature of the shift he wants to make is the right one. i just wish he didn't have to bankrupt the nation financially to achive this return to sanity.

Feb 28 12:28 PM

[JohnL:]

--The business cycle is basically a product of group psychology.--

Not to beat a dead horse, but I don't think the group wakes up one day and says "house prices are going to start going up, forever, and I should buy one." Agreed: once they start buying, group psychology takes over. But I think there is a triggering event that kicks off the psychological shift.

My argument is that the trigger, throughout the history of fractional-reserve banking and fiat money, has been the manipulation of credit conditions by the banking system. Further, if they weren't manipulating the supply of credit, any boom psychology would be reined in quickly by the natural price response (i.e. increased interest rates) to the increased demand. Instead, we have central bankers' "elastic money supply" which breaks the price-response mechanism, thus taking the reins off these shifts and letting them run to extremes. Of course they are then followed by the inevitable credit crunch we are seeing today.

Conclusion: If we want stable markets, we need stable money.

Feb 28 12:51 PM

[P. Kalven:]

After careful study of the matter I have drawn the following conclusions from reading the commentary in SA over current events with regard to the business cycle the consensus is:

Recovery: FDR was right
Growth: Greenspan was right
Boom: P.T Barnum was right
Bust: Nostradamus wad right

Good article John thank you for a sound perspective.

Feb 28 01:01 PM

[jksisco:]

It is hard to isolate one particular entity or event that has preceded this most amazing point in time, as so many factors were involved. It has characteristics similar to past episodes, yet, is uniquely so now. One can see that so many golden opportunities exist to produce tangible, productive corrections to previous misguided applications of power, greed and avarice. Until our Central Government adheres to basic Constitutional powers, we will continue to be beset by "cycles" of boom and bust rather than episodes of "natural" economic expansion and contraction. Political favors and ideology are the main impediments to a free market, which, should reward fundamentally sound companies only and flush out and then punish laggards. Yes, we have a once in a lifetime opportunity to produce real benefits from this episode that has exposed the worst of our current mindset, it remains to be seen whether we will have the wisdom to do what is necessary.

Feb 28 02:20 PM

[jstratt:]

3 Cheers for an excellent perspective

I feel sorry for young folk today. They not only didnt experience a recession but dont have an idea that you can live without huge debt.

Young or old we are in a time where money will be separated from those who dont manage it wisely. I wish everyone luck and the skill to manage debt.

Feb 28 07:01 PM

[mediapro:]

Unfortunately, we have been "staying the course" for at least the past thirty years.

The introduction, ascendency and idolatry of Milton Friedman's brand of shock economics has done more to destroy the world's economy than any econmic theory in our lifetime. This is not just Reaganomics /Bushanomics, but the pitting of haves/have nots in a global play orchestrated through Milton's disciples within the IMF, World Bank, and governing neo-conservative world view since at least 1975.

Cutting taxes on the wealthy and re-distributing middle class income up to those captains of industry combined with narry a veto on the past six years of spending bills full of Republican pork projects, and conveniently leaving the $1 Trillion dollars of Iraq war spending off the books while the national debt ballooned from around $5 Trillion to $10.6 Trillion at last peek is an ingenious spin on what constitutes supply side stimulus, if not outright delusion.

Count the change left in your pockets, unless of course you are one of the few who benefitted from this latest episode of Shock Economics so popular with necons. I'll just ask you the same question Reagan used to ask: "Are you better off now than you were four years ago?"

If you're in the same boat as the rest of us, our "staying the course" has undeniably run the lot of us aground. If you have benefitted, then you're one of the lucky 2% that control 80% of America's wealth, completely comfortable that you'll ride out the storm until the next lunatic can covince most of the people all of the time into something completely counter to their own self interest.


On Feb 27 12:24 PM Eokram wrote:

> I completely agree. When George H. W. Bush told everyone to "stay
> the course," and that the economic downturn was a natural part of
> the ups and downs of the economy, he was not re-elected for a second
> term. Politicians (both Dem and Repub) learned this lesson - that
> if there is even a little recession, the American people shout "It's
> the economy stupid" and fire you.

Mar 01 04:16 PM

[a believer:]

Sorry to diappoint, but *we* cannot sit down, create, and implement a model. It is that kind of thinking that is in fact lunacy.


On Feb 27 12:57 PM User 270430 wrote:

> Ok, who designed this economic model which requires insanity followed
> by collapse? I
>
> t's the 21st century, surely we can sit down and come up with a better
> model that does not threaten Western Civilization every couple of
> generations.
>
> I mean think about WWI, WWII, and god forbid, if the current "recession"
> leads to WWIII... You get the picture? Pure lunacy, in my opinion.
>
>

Mar 01 05:18 PM

[johnbee:]

Without knocking Lounsbury he's just stating the obvious. I was born in Feb 1940 in the UK when the German bombs started falling on our town and we installed an air raid shelter for the next five years. I went to school at 5 seeing bombs falling on houses nearby. The Normandy invasion started outside our house and our beaches were not cleared of mines until I was ten. At 15 food rationing finally finished but not until I was 34 did protectionist exchange controls finally end, but then we had the '74 stock market collapse and my bonuses didn't get paid, and all the London banks were bust but it was all kept quiet away from the public. The result was Union power and Socialism that took ten years for Mrs Thatcher to bust. I am now 68. Not that old - but for the last 20 years I have watched new financial dodges being found to stave off the inevitable cyclical falls and the better they were dodged then the bigger the one had to be that was not dodged! The US banks blew it and screwed the rest of Europe with their junk debts ands ran scared and got Paulson to cry for help. So now you've got Obama. The world is on a perpetually speeded up treadmill of boom or bust. Bankers know this very well but they don't care so long as they make fortunes on the way and get bailed out when the damage is done. If a system can't sustain boom then at the extreme it will be back to barter as was much of Europe in the 1940's. Will Obama dodge this one with even more credit or will the West collapse? If it does then protectionism will be back with cuurency and gold controls. Its already arrived with handouts to major companies against World trade rules, and soon there will be inflation to pay back Govt debts at half price to put up house prices to where they were and 15%+ interest rates to equal the inflation rate and a BigMac at $10.00. We are not doomed. People always come out of these things- it just takes time.A decade or so usually.Russian and Terrorism threats will be forgotten as people concentrate on reality at home.Youth will need learn to work harder for less expectation. Maybe some new values will appear for the better for a while and bankers need be penitent. Booms need fast growing populations to work and to spend, or alternatively they need to be decimated to start all over. Plague or war or colonisation used to solve the problem. The age of the computer first gave the US immense productivity gains but there is nothing on the horizon now to equal them. China and India and the Far East are the places that will drive growth. The old world had better invest there or die a slow death.
and thats where to concentrate

Mar 02 01:25 PM

[John Lounsbury:]

johnbee - - -

No knock perceived. I often write what I think is obvious and people feed back that it was informative. What is obvious depends on who is looking (or reading).

Very fine comment.

Mar 03 12:48 AM

[max12345:]

What is relatively new now compared to Feb. 1940 is that: a) the world now has over 6.5 billion people on it (and is rapidly heading towards 10) b) we're now past peak oil and at or past many other "peak commodities" and other resources (such as water, forests and fish) c) humankind (generally speaking not very kind at all) is continuing to rape, pillage and pollute mother earth at ever increasing frenetic speed; d) 3% economic growth forever is not "sustainable" on a planet with finite space and resources;

What instead remains about the same is that: the world continues to be carved up into 200 or so ridiculous entities called "nation-states" (all of which consider themselves "sovereign"... and proud of it) five or six main religions and their related ideological and "ethical" frameworks and over 5000 languages;

Radical transformation (of economies, polities, societies and institutions) from top to bottom and from left to right needs to occur (and quickly) if all these happy denizens of lonely planet earth are going to make it into the 22nd century. The current economic and financial crisis is probably one of the last opportunities to get our collective act together in some brand new ways. Is it going to happen? So far it doesn't look like it.

So maybe some brand new fascist state's bombs need to drop on us for
at least five years. (anybody see any good candidates out there?) (there ARE a few!)

Mar 03 06:27 AM

[Ivo P. Jane...:]

Your introduction of cancer analogy to the current economic crisis debate is quite appropriate as there are many similarities between cancer and economic bubbles. Both processes can be modeled (see reference below) to be affecting systems that are functioning way outside of their normal range in what is labeled the outer edge of chaos. Here, such systems exhibit many characteristics including disorganized complexity, loss of value creation (as a consequence of some components of the system maximizing only their benefit, e.g. cancer/a financial sector without regard to the entire system-the human body or the society); this behavior causes system instability and heightened susceptibility to the butterfly effect/a Nassim Taleb’s black swan, which is a key characteristic of chaos theory. As with the exponential growth of cancer cells, which drain all energy reserves from the entire body, this process has been mirrored by the massive expansion of the financial debt instruments that have already drained most of societal resources.
The modeled path to the re-establishment of healthy biologic functional and structural oscillations of human body affected by cancer, is similar to the journey back to “physiologic” societal business cycles, and requires the return to system’s organized complexity. For the undifferentiated cancer stem cells, that means imposing differentiation to revert them to a specific function that contributes to the entire system’s value creation, epitomized by the evolutionary progression, not destruction, of the human body. A financial equivalent of this biologic process would require re-differentiation of the financial sector, from maximizing self, to optimizing the larger societal system.
Reference
Janecka IP: Cancer control through principles of systems science, complexity, and chaos theory: A model. Int J Med Sci 2007; 4:164-173. www.medsci.org/v04p016...

Mar 03 02:46 PM

[sleepless_o...:]

Dr. Janecks - - -

Thanks for a very thorough description of the complexity that my metaphor attempted to invoke. I could never have given such a precise description of the tug of war between treating the disease and destroying the patient.

I hope that readers will take the time to read your comment carefully.

Mar 03 03:08 PM

[mediapro:]

Sir.

Read "Confessions of an Economic Hitman" by John Peterson. Eyes open, you won't view the world through the same good (US captialism)/evil (every other country)lens again.

As a man on the inside of the capitalist, expansionist game, he takes the reader through his own experience of plying Milton Friedman's brand of Shock Economics thorughout the world stage.

Counter to your view, the US has effectively used war to export capitalism to the detriment of Iraq, Iran, Malaysia, Bolivia, Argentina, Equador, Venezuela, Chile, a number of African countries since the close of WW II.


On Feb 27 02:09 PM CLH wrote:

> Very good paper John. Few people understand capitalism. Our schools
> only teach socialism.
>
> Capitalism corrects its own mistakes which is its beauty. Socialism
> has no method ot correction except war.

Mar 08 07:50 PM