Talking Ourselves into a Lasting Recession

Maybe it’s time to declare victory and withdraw. That was the joke when the United States was mired in the Vietnam War, but it might be a good strategy for dealing with this recession.

We are about to the enter the third month of the Obama administration, and we’re still in recession. When I say that in speeches, people laugh. They know that the economy won’t turn around in a couple of months. The people who don’t understand this are the politicians and op-ed writers. They continue to tell us that the stimulus policy hasn’t worked, despite the fact that it has not yet begun. They tell us that monetary policy is not working, even though the dean of monetary policy studies, Milton Friedman, said that the time lags are “long and variable.” Comments about bank lending usually ignore the typical recessionary pattern, which is falling loan demand during recessions.

There’s a plausible case for believing that the economy will soon hit bottom, soon being within the next three to six months. Thereafter we’ll have a mild expansion. This forecast is so plausible that it constitutes the average of professional forecasters. Yet it seems wildly optimistic to the man and woman on the street. We get so much bad news that no one believes it will ever turn positive. As I write this, I’m on a snowy mountain in Montana, where morning temperatures are below zero, and it’s hard to believe that in a few months the snow will be melted, golfers will fill the valley, and sailors will cover the lake.

There’s a school of thought that says we can talk ourselves into recession. My friend Jim Blasingame, the Small Business Advocate, has advanced that notion and I’ve told him he was wrong. I’m starting to think, though, that he’s right this time round. Continued debate over stimulus and bailouts keeps the economy in the news. Every day, people tell me that this will be a long slump. What’s the basis for their conclusion? They keep hearing bad news day after day, week after week, month after month

There’s no economic model I’m aware of that allows for a sudden turnaround in the economy. There are time lags all over the place. If we’ve conducted perfect economic policy since last summer, we’ll still have to wait for those time lags. However, the basis for believing that conditions will never change is equally weak.

In the meantime, let’s stop listening to politicians talk about “jump-starting the economy,” a result than cannot be achieved by anybody.

President Obama should give the following speech:

My fellow Americans. We have taken bold action. We have passed major economic stimulus bills. We have constructed new financial market programs. The Federal Reserve has injected new reserves into the banking system. These actions will work, but they will take time. We are now in the waiting stage.

While we wait for our policy actions to end the recession, my administration will turn to the other urgent issues that the country faces: education reform, environmental policy, and steroids in baseball. Please join me in these debates.

Comments

[User 143167:]

The question is not when the fiscal and monetary policies will work. The question is why they must work? These policies, in their deep nature, just want to replace a bursting bubble by another bubble or help the economy to absorb the short-term overcapacities. Nothing fundamental will be touched and changed. So they basically postpone a problem and accumulate them into a later day.
Now as we have this debacle, is it just because subprime, or MBS and housing sector in large concept? No. It is about the way the world's economy and financial system operates and this is a ballon-payback for all what they did in the past 30 years, maybe even longer.
Fiscal and monetary policies? Ain't this crisis created by the irresponsible fiscal policy and too-loose monetary policy in the past? So tell me why they must work again this time?

Mar 16 03:19 AM

[bs_o_meter:]

Bill, your an economist. This does not give you a free ride to say whatever comes into your head. This is a fluff article. How about a little evidence about why your are saying this.

Mar 16 04:11 AM

[Moon Kil Woong:]

t is a misnomer that government stimulus has no effect. Government cash injections have an effect although it often is dwarfed in a strong downturn and is slow in coming.

Even so, there is a real risk that government action will deliver a slew of unintended consequences as bad if not worse than the initial symptoms.

Thus it is best to avoid government action unless absolutely necessary.

Mar 16 06:40 AM

[kelm:]

The idea that if somehow we stop talking about it it will all be better is the current "cool" topic. I have heard many people say this personally and it makes no sense. Let's think about what "not talking about it" would mean:

1) please don't show me any lines of unemployed at soup kitchens, it's inconvenient and makes me feel bad.

2) Please stop taking or at least releasing any information on the unemployment rate - it is disturbing

3) Please stop publishing figures on what my house is worth - I can't sleep at night

4) Let's stop publishing the DOW, S&P and Nasdaq numbers it's bad enough looking at my 401k...
etc.

Would you really prefer this to be told everything is fine or simply not given the information?

This is a global crisis. The idea that we want to close our eyes to it is childish at best and dangerous in the electorate of the nation that is supposed to lead the world.

Mar 16 09:39 AM

[relaplan1:]

The problem is not talk. The problem is debt!

Mar 16 10:42 AM

[MikeOz:]

I agree with what Bill is saying. Isn't economics a behavioural science as much as anything ?

If I hear a stream of news about the economy turning down, then I will start to worry about my job, and I decide to defer buying that furniture / car / holiday / restaurant meal etc or whatever else was on the consuming agenda until later - even though my financial position hasn't actually changed and I can afford that purchase now.

That behaviour in enough numbers causes someone else to lose their job.

Their job loss obviously results in a further drop in consumer spending, and so it goes. My increased level of savings will not have any short term benefit for the economy.

And when people like Kelm (above) say it's a global crisis - that's not quite the way the 95% of the world's population who live outside the USA see it.

In general we of the 95% (I live in Australia) see it as an American crisis with foreign implications (to adapt one of Kissinger's lines.)

The rest of the world is suffering primarily because:

(a) they invested in US mortgage securities

(b) the economic dislocation in the US (as one-third of the world's economy) has caused key export based economies to shrink (China / Japan / Germany etc)

(c) banking is international - letting an institution like Lehman fall over might cause some unlucky bank half way around the world to lose 10% of its capital base.

Mar 16 11:15 AM

[a. palmer jr.:]

A little off the subject I guess, but it appears that our present government is doing the same thing they accused the Bush administration of, namely throwing money at the rich. Why give all that money to the banks just so they can shower each other with bonuses? I don't see where it's helped much. They say it's freed up money for loans, but why not give the money directly to the people and lots of us wouldn't need loans!

Mar 16 11:40 AM

[ain't no fo...:]

Perhaps if CNBC didn't trot out 3 or 4 repugnican congressmen on a daily basis to trash the stimulus and everything else the administration is trying to do to bail US out of what the repugnicans caused with their 12 years of monstrous deficit spending and self serving earmarks, people would be able to at least take a break from the doom and gloom once in awhile.

But they keep hammering away, playing the blame game (how ironic the repugs used to blame the democrats for playing that very same game, and not its their rallying cry) - its almost like they want this administration to fail - oh, but that would never happen would it? I mean, the repugs are selfless patriots just wanting what's best for ALL of US.

Yuh.

Mar 16 12:26 PM

[henarl:]

If you are one of the millions who have, or are about to, lose their job or their business or their home to foreclosure, solutions that are months or more away do you little good. While so far that is a minority of the population, it is what the rest of us are hearing about constantly so we are naturaly worried that it could happen to us too. Sticking your head in the sand and ignoring possible disaster is not a normal reaction.

Mar 16 01:30 PM

[PainfullyAware:]

Believing that "One Team" is responsible for the current situation is Mentally Minuscule.

Neither “Party” has been responsible with the peoples money since I can remember.

The “R”s and “D”s may change but the foolishness continues.



On Mar 16 12:26 PM wpdragon wrote:

> Perhaps if CNBC didn't trot out 3 or 4 repugnican congressmen on
> a daily basis to trash the stimulus and everything else the administration
> is trying to do to bail US out of what the repugnicans caused with
> their 12 years of monstrous deficit spending and self serving earmarks,
> people would be able to at least take a break from the doom and gloom
> once in awhile.
>
> But they keep hammering away, playing the blame game (how ironic
> the repugs used to blame the democrats for playing that very same
> game, and not its their rallying cry) - its almost like they want
> this administration to fail - oh, but that would never happen would
> it? I mean, the repugs are selfless patriots just wanting what's
> best for ALL of US.
>
> Yuh.

Mar 17 12:10 AM

[PainfullyAware:]

Anyone saying that we are "Talking Ourselves Into Recession" is obviously insulated from the reality that besets the masses.

Yes, The "Disaster Freaks" of the mainstream media are having their day; but reality was evident before the "News Fools" bought in to the current situation.

The calamity is Rooted in the lack of confidence in Level 3 Assets and will not be mitigated by fantasy and foolish "Treating The Symptoms".

Mar 17 12:20 AM