[my comments in brackets -- I corrected some errors and added a final paragraph]
17 reasons America needs a recession Think positive, this 'slow motion
train wreck' is good for the U.S.
By Paul B. Farrell, MarketWatch
Last Update: 6:53 PM ET Nov 19, 2007
ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession.
Bernanke and Paulson won't admit it. And investors hate them. We're
all trapped in outdated 1990s wishful thinking about a "new economy"
and "perpetual growth."
But the truth is, not only is a recession coming, America needs a
recession. So think positive: Let's focus on 17 benefits from this
recession.
To begin with, recession may be an understatement. Jeremy Grantham's
GMO firm manages $150 billion. In his midyear report before the credit
crisis hit he predicted: "In 5 years I expect that at least one major
'bank' (broadly defined) will have failed and that up to half the
hedge funds and a substantial percentage of the private-equity firms
in existence today will have simply ceased to exist."
He was "watching a very slow motion train wreck." By October, it was
accelerating: "Train hits end of track at full speed."
Also back in August, The Economist took a hard look at the then
emerging subprime/credit crisis: "The policy dilemma facing the Fed
may not be a choice of recession or no recession. It may be between a
mild recession now, and a nastier one later."
However, the publication did admit that "even if a recession were in
America's long-term economic interest, it would be political suicide"
for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to
suggest it.
Then The Economist posed the big question: Yes, "central banks must
stop recessions from turning into deep depressions. But it may be
wrong to prevent them altogether."
Wrong to prevent a recession? Why? Because recessions are a natural
and necessary part of the business cycle. Remember legendary economist
Joseph Schumpeter, champion of innovation and entrepreneurship?
Economists love Schumpeter's "creative destruction:" Obsolete firms
get destroyed and capital released, making way for new technologies,
new businesses, like Google. And yet, nobody's willing to apply
Schumpeter's theory to the entire economy ... and admit recessions are
a natural part of the business cycle.
Instead, everyone persists in the childlike fairy tale that "all
growth is good" and "all recessions are bad," a bad hangover of the
'90s "new economy" ideology. So for the folks at the Fed, Treasury and
Wall Street, "eternal growth" is still America's mantra.
Unfortunately, the American investors' brain has also developed this
blind obsession with "growth-at-all-costs," coupled with a deadly fear
of all recessions, as if recessions are a lethal super-bug more
powerful than Iran with a bomb.
Our values are distorted: It's OK to be greedy and overshoot the
market on the upside -- grab too many assets, take on too much debt,
make consumer spending a religion, live beyond our means, ignite
hyperinflation along the way. Growth is good, even in excess.
[!!??!! -- hyperinflation is not currently in the cards. It also
seems unlikely, unless the US government falls apart.]
And yet, recessions are a no-no that drives politicians, economists
and investors ballistic.
Well, folks, you can block all this from your mind, you can argue that
recessions are not a part of Schumpeter's thinking, that they are
inconsistent with your political ideology. But the fact is, we let the
housing/credit boom become a massive bubble, it popped and a recession
is coming. So think positive, consider some of the benefits of a
recession:
1. Purge the excesses of the housing boom
No, it's not heartless. Not like wartime calculations of "acceptable
collateral damage." Yes, The Economist admits "the economic and social
costs of recession are painful: unemployment, lower wages and profits,
and bankruptcy." But we can't reverse Greenspan's excessive rate cuts
that created the housing/credit crisis. It'll be painful for everyone,
especially millions of unlucky, mislead homeowners who must bear the
brunt of Wall Street's greed and Washington's policy failures.
[This author should quote Andrew Mellon, Treasury secretary during the
1920s: "liquidate labor, liquidate stocks, liquidate the farmers,
liquidate real estate." His whole idea is that a recession would purge
the imbalances from the US economy -- i.e., those factors that are
screwing up financial and real-world markets. This is a very 19th
century way of looking at things. For example, Marx saw the bankruptcy
of thousands and the destruction of a lot of capital as the result of
a recession ("crisis") and also as allowing a new recovery.
[Of course, neither Mellon nor Marx anticipated that a cyclical
recession could cause the US economy to jump the rails, going from a
normal business cycle to a serious depression. Okay, Marx had some
ideas along these lines. In some Marxian interpretations, a serious
recession would encourage revolution.]
2. U.S. dollar wake-up call
Reverse the dollar's free fall and revive our [i.e., US capitalist]
global credibility. Warnings from China, France, Iran, Venezuela and
supermodel Gisele haven't fazed Washington. Recession will.
[I don't see why a recession would do this. If the US recession "goes
global," it won't just be US imports that fall, helping the US$. It
will also be foreign exports (US imports) that fall, which would hurt
the value of the US$. ]
3. Write-offs
Expose Wall Street's shadow-banking system. They're playing with $300
trillion in derivatives and still hiding over $100 billion of toxic
off-balance sheet asset-backed securities, plus another $300 billion
hidden worldwide. A lack of transparency is killing our international
credibility. Write it all off, now!
[again, purge, purge! Let's be the capitalist Stalin, purging them all!
[I don't see how this is the result of a recession, however.]
4. Budgeting
Force fiscal restraint back into government. America [by which he
means the government here] has been living way beyond its means for
years: A recession will cut back revenues at all levels of government
and cutbacks will encourage balanced budgeting.
[This is the "starve the beast" theory in a new form. It doesn't force
fiscal conservatism -- in fact a recession would make the governments'
deficit that much larger. It could cause a bunch of state and local
governments to go broke, as in the 1930s. It likely would cause a much
greater cut-back in public services than we've already suffered. Rich
people like Farrell won't suffer, but most others will.]
5. Overconfidence
A recession will wake up short-term investors playing the market. In
bull markets traders ride the rising tide, gaining false confidence
that they're financial geniuses. Downturns bruise egos but encourage
rational long-term strategies.
[A recession could also cause a 1930s-type funk to dominate the
financial mind-set. That may encourage rational long-term strategies.
But even more important is having serious and intelligent financial
regulation of the sort that kept the US financial system "sane" during
the 1950s and 1960s.
[how about the idea of bringing back sanity-making regulations without
having a recession?]
6. Ratings
Rating agencies have massive conflicts of interest; they aren't doing
their job. They're supposed to represent the investors, but favor
Corporate America, which pays for the reports. Shake them up.
[but at what cost? why not use financial regulation instead?]
7. China
Trigger an internal recession in China. Make it realize America's not
going into debt forever to finance China's domestic growth and
military war machine. A recession will also slow recycling their
reserves through sovereign funds to our equities.
[a Chinese recession would mean a big fall in US exports. The US
doesn't just import from China, you know.]
8. Oil
Force the energy and auto industries to get serious about emission
standards and reducing oil dependency.
[I don't get this one at all: it's government regulation and/or high
oil prices which encourage reducing oil dependency. It's government
regulation which forces better emission standards. A recession could
simply drive a lot of companies up against the wall, making them even
more resistant to the necessary regulations.]
9. Inflation
Expose the "core inflation" farce Washington uses to sugarcoat reality.
[This is total crap. He's saying that "Washington" under-measures
inflation, using the core inflation rate (which leaves out energy &
food inflation). But it's only fools like Farrell who read it this
way.
[Instead, the core inflation rate is an effort to get a handle on what
part of inflation is persistent rather than being a flash in the pan.
He may be right that inflation is under-measured (given the Boskin
commission changes), but a recession wouldn't expose anything about
that. It's just Farrell's hobby horse.]
10. Moral hazard
Slow the Fed from cutting interest rates to bail out speculators.
[this guy doesn't really understand the world: a recession would
create political pressure pushing the Fed to cut rates. Having the Fed
not bail out speculators is instead necessary to causing a recession.
He's got the causation backward.]
11. War costs
Force Washington to get honest about how it's going to pay for our
wars, other than supplemental bills that are worse than Enron-style
debt financing.
[this doesn't work at all. Since when does a recession cause honesty?
Financial panics do expose lies, but desperation often encourages more
crime. When the savings & loans were collapsing, it encouraged some
people -- such as Charles Keating -- to figure out how to fleece
people as a way to save their S&L's bacon.]
12. CEO pay
Further expose CEO compensation that's now about five hundred times
the salaries of workers, compared with about 40 times a generation
ago.
[see comment under #11.]
13. Privatization
Stop the privatization of our federal government to no-bid contractors
and high-priced mercenary armies fighting our wars.
[why wouldn't a recession -- which cuts tax revenues -- be used as an
excuse for further privatizations?]
14. Entitlements
Force Congress to get serious about the coming Social
Security/Medicare disaster. With boomers now retiring, this problem
can only get worse: A recession now could avoid a depression later.
[like most jerks and Beltway insiders (I'm sorry to repeat myself),
Farrell mixes Social Security with Medicare, falsely equating their
problems. Social Security is not a serious problem at all. Medicare is
a serious problem, but largely because of the medical-care inflation
that's hitting the private sector. It's true that a recession would
slow medical-care inflation, but it would also encourage firms to dump
what's left of their employees' health insurance.]
15. Consumers
Yes, we're all living way beyond our means, piling up excessive
credit-card debt, encouraged by government leaders who tell us
"deficits don't matter." Recessions will pressure individuals to
reduce spending and increase savings.
[the problem, of course, is that a recession means a fall in consumer
incomes, which makes saving more difficult. To the extent that people
save more, that encourages recession -- unless fixed investment keeps
from falling. But falling consumer spending, all else equal, causes
fixed investment to fall.]
16. Regulation
Lobbyists have replaced regulation. Extreme theories of unrestrained
free trade plus zero regulation just don't work; proven by our credit
crisis, hedge funds' nondisclosures, private-equity taxation, rating
agencies failures, junk home mortgages, and more. Get real, folks.
[maybe he's thinking that a recession would stimulate a mass movement
or three, as during the 1930s, which would force the government to
bring back New Deal-style reforms that make capitalism work in a saner
way than it does these days. Interesting theory: it goes back to the
ultra-left "the worse, the better" theory, in which recessions
encourage political reform.]
17. Sacrifice
"We have not seen a nationwide decline in housing like this since the
Great Depression, says Wells Fargo CEO John Stumpf. As individuals and
as a nation Americans have always performed best in crises, like the
Depression or WWII, times when we're all asked to make sacrifices.
Pampering us with interest-rate cuts and tax cuts during the Iraq and
Afghan wars may have stimulated the economy temporarily, but they
delayed the real damage of the '90s stock bubble while setting the
stage for this new subprime/credit crisis.
Wake up, the train wrecked. Time to think positive, find solutions,
demand sacrifices.
[are rich folks like Farrell going to make sacrifices too?
[More importantly, there's a strange contrast in Farrell's diatribe.
On the one hand, it's like a rant by Travis Bickle, the psycho cabbie
in the movie Taxi Driver: "Someday a real rain will come and wash all
the scum off the streets." His hope is that it will all work out for
the best for the people (or that is what he implies). On the other
hand, his goal involves nothing but sacrifice by the many. It's one
big Austerity Plan.]
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
