Does America Need a Recession? Of Course Not...

Does America need a recession? I say no, but The Economist has other ideas:

Does America need a recession?, The Economist: ...When the Fed cut its discount rate on August 17th, it admitted for the first time that the credit crunch could hurt the economy. ... Economists are arguing vigorously about how much damage falling house prices and the subprime mortgage crisis will do. But there is one question that is rarely asked: even if a downturn is in the offing, should the Fed try to prevent it?

Most people think the question smacks of madness. ...

But should a central bank always try to avoid recessions? Some economists argue that this could create a much wider form of moral hazard. If long periods of uninterrupted expansions lead people to believe that the Fed can prevent any future recession, consumers, firms, investors and borrowers will be encouraged to take bigger risks, borrowing more and saving less. During the past quarter century the American economy has been in recession for only 5% of the time, compared with 22% of the previous 25 years. Partly this is due to welcome structural changes that have made the economy more stable. But what if it is due to repeated injections of adrenaline every time the economy slows? ...

The economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy. These cannot be dismissed lightly. But there are also some purported benefits. Some economists believe that recessions are a necessary feature of economic growth. Joseph Schumpeter argued that recessions are a process of creative destruction in which inefficient firms are weeded out. Only by allowing the “winds of creative destruction” to blow freely could capital be released from dying firms to new industries. ...

Another “benefit” of a recession is that it purges the excesses of the previous boom, leaving the economy in a healthier state. The Fed's massive easing after the dotcom bubble burst delayed this cleansing process and simply replaced one bubble with another, leaving America's imbalances (inadequate saving, excessive debt and a huge current-account deficit) in place. A recession now would reduce America's trade gap as consumers would at last be forced to trim their spending. Delaying the correction of past excesses ... is likely to make the eventual correction more painful. The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be a choice between a mild recession now and a nastier one later.

This does not mean that the Fed should follow the advice of Andrew Mellon, the treasury secretary, after the 1929 crash: “liquidate labour, liquidate stocks, liquidate the farmers, and liquidate real estate...It will purge the rottenness out of the system.” America's output fell by 30% as the Fed sat on its hands. As a scholar of the Great Depression, Ben Bernanke, the Fed's chairman, will not make that mistake. Central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether.

Of course, even if a recession were in America's long-term economic interest, it would be political suicide. A central banker who mentioned the idea might soon be out of a job. But that should not stop undiplomatic economists asking whether a recession once in a while might actually be a good thing.

So let's talk undiplomatically about this:

1. I disagree that we need recessions to have a dynamic economy. Equilibrium means (in simple terms) "no tendency for change" and there is nothing inconsistent with having a constant flow of entering and exiting firms at equilibrium.

When profits are high - as in the traditional price signaling story - there is a rush to enter industries, but the trick is to get there first and take some of the profits before others beat you to it, innovation and technological change are not so important. There are lots of profits to be had by entering with existing technology so, while it does allow the installation of the best and latest technology, there's no strong pressure to innovate. In fact waiting until there is an innovation could be costly.

It's when conditions are tight, i.e. when everyone is making close to zero economic profit, that new cost saving or demand enhancing technological change will pay off. If you have a better product or lower costs than rivals, then you will gain an edge and realize profits. The only way to get ahead is to build a better mousetrap. Sure, conditions will be tight in recessions - that's the traditional creative destruction story - but things are tight in a competitive equilibrium too and the pressure to innovate does not disappear just because the economy is operating at full employment.

So I don't see why a full-employment equilibrium cannot also be a dynamic economy. That is, suppose there is an industry with 1,000 firms in it all doing about the same thing (producing pizza), but every year (at a continuous rate throughout the year), 100 go out of business and are replaced by 100 new firms with a cost advantage or better product (let's put cheese in the crust!). There is no recession here, a firm comes up with a better idea, enters (leading to temporary overemployment), and drives someone else out of business.

I am not an Austrian economist and I don't play one on the internet, so I won't claim to be able to recite what Schumpeter (or anyone else in the Austrian camp) said about this on a particular page of one of his books, so maybe someone who is an adherent to this "we need business cycles" approach can explain why we cannot wipe out the inefficient while remaining at or very near full-employment.

2. Overproducing houses is not like overproducing goods that cannot be stored, i.e. perishables. When too much popcorn is produced relative to demand, it goes to waste. Resources that could be used elsewhere are wasted forever since the excess can't be frozen or stored for the future (or at least assume so for the purposes of illustration, there is that stuff in movie theaters). With houses, there is an intertemporal shift in resource use, but since houses don't spoil in a short period of time, and because people will continue to demand them in the future, overproduction today will result in underproduction tomorrow. The houses were built too soon, and that's an efficiency loss because we gave something up, but when we produce less houses later we can recover (some of) the goods that were lost (too many houses and too few cars in year one, but in year two it's the opposite, too few houses and too many cars relative to the no distortion outcome). In the case of popcorn, since it couldn't be stored, lack of storage means we didn't have the opportunity to produce less later, so there is no way to make up for it, even in part, later on.

That is to say, I hope we don't "creatively destroy" the houses that were (over)built. Sure, some can be creatively transformed into restaurants, business offices, etc., to attenuate the misallocation in the short-run, but there's no need to tear them down and replace them. With time, population and demand will grow, and the houses will be filled. Hula hoop factories needed to be creatively destroyed, they needed to be torn down and replaced - it's unlikely demand will return in the future so having those factories around would be a waste, they would never be re-opened - but houses are not hula hoops. With houses, there is no need to "purge the excesses of the previous boom," just wait for population to catch up (and would it be so bad to have low cost housing available in the interim?).

3. I don't understand the reasoning that says the Fed should not stabilize the economy because it will "create a much wider form of moral hazard. If long periods of uninterrupted expansions lead people to believe that the Fed can prevent any future recession."

The reasoning is that if we stabilize the economy, people will then believe recessions are impossible (or underestimate their likelihood) and make bad decisions, so we shouldn't stabilize at all.

People who believe the Fed can prevent all economic fluctuations will be, so to speak, "creatively destructed" the first time there is a recession. But to refuse to stabilize the economy to the best of our ability because we are afraid people might misperceive the degree of stability that is attained seems misguided to me. I would have thought an Austrian response would be to do what's best for the economy and let those who misperceive be weeded out by the market process (or better yet, that they become informed about the true risks - this is a market failure from lack of information and while I'm pleased to see The Economist acknowledge markets can fail, the solution is to provide the information, not to refuse to stabilize).

Comments

[robertdfeinman]

Random comments:
1. I'm of the opinion that we are already in the beginnings of a recession. When the CEO of Walmart says sales are down because "people are running out of money before the end of the month", prospects are not rosy.

2. Some people like recessions for moral reasons. They feel that those who were involved in "excess" must be punished. The always fail to notice that it isn't those with the 500 foot yachts that suffer, but those at the bottom. I think a lot of "Anglo Saxon" economic thought these days has its roots in our Puritanical founding. Thatcher brought this mindset to the UK and it has now spread to Australia as well.

3. Some people like recessions since they see it as a way to pick up assets at bargain prices. If you look at the panic in the bond market these days you can see many long-term possible opportunities. Even blue-chip instruments have been beaten down. Does anyone really think GE is going to default? Warren Buffet seems to be taking this attitude. He announced several weeks ago that he thought there would be bargains around.

4. I don't see much discussion of inflation and/or devaluation in all of this. There has been some on the economic blogs, but not in the general press. Looking back we see that, in general, underfunded wars lead to one or both outcomes. One can look at Germany in 1923 or the US after LBJ for popular examples. There are many others. This may mean that bond prices are low, not because of fears of default, but because of fears of a weakening dollar.

Given all the attention paid to the Fed and other central banks it seems to me that they must be either ineffective or incompetent. Since the rise of central banks the degree of economic disruption hasn't abated. There have been, perhaps, some longer periods between crashes in some countries, but the "cycle" hasn't been tamed by any means.

[Idaho_Spud]

Does America need a recession? No. Does it need to de-leverage in carry trade, credit markets, equities, LBO, M&A, national and personal debt? Yes.

Is there a mechanism for inducing the fear needed to accomplish this de-leveraging, short of having the massive grizzly's steamy roar in everyone's face? I don't know...

Nouriel Roubini argues convincingly that the Fed responds assymetrically to asset price increases: It ignores or denies them while inflating, then eases when they deflate.

If the Fed accurately measured asset (read housing) inflation, they could have forestalled the current credit/housing bubble, and there would be no need for discussion of bailouts and recessions.

[Robinia]

I am no expert, but did concur while reading the Economist piece that it seemed a misreading of Schumpeter. I always thought that the "winds of creative destruction" were thought to be caused by the disruption of the market equilibrium that came about when an innovation caused volatility in the price of a given industry's product, not a result of an overall business cycle effect.

And, of course, destabilization of the status quo in an industry through innovation is not threatened by good monetary policy. In fact, an overall monetary stability encourages innovation-- as Jane Jacobs would say, "new ideas need old buildings"... better for the bootstrap entrepreneur with an industry-disrupting idea to find that credit is available to take the risk on that old building, than to face an economy where the bank is foreclosing on the building (so it is not for sale), and capital lenders are over-cautious and demand too much collateral (favoring the mature industry over the start-up).

The Economist has the wrong villain when it comes to the inhibiting of the gales of creative destruction. In my opinion, the US has instituted a "war between the states" in economic development that has resulted in a large number of existing mature firms having the leverage to tip the playing field in their favor. A large employer in a given location need only threaten to move jobs elsewhere to receive a government-sanctioned reprieve from some or all taxes. New, small and innovating firms, as they have not yet created the jobs that they could use to extract the favors, are at a comparative disadvantage. While we should be careful not to over-emphasize this effect (taxes are a small part of the cost of doing business), it is definitely anti-Schumpterian.

[evagrius]

The only recession necessary is one focused on the top 1% of income/wealth earner/owners.
Of course, they are never the ones that face the results of a recession.

Concerning houses; I think the argument is faulty. There's something not quite right in building McMansions 2, 3, 4 hours commute from work. There's something not quite right in building them as energy inefficient. And there's something not quite right in building shopping malls and suburbs on prime agricultural land, ( as in the Central Valley in California).

[spencer]

I think recession occur when the business community makes a mistake and the recession is the process that gets the community back into the type of equilibrium that our host is discussing. In the housing sector the business community has made a major mistake and is experiencing a recession type environment as they return to the long run equilibrium.

But what has the rest of the economy done that requires a correction. Most of the rest of the economy is in pretty good shape and there is little evidence that the housing weakness is spreading to the rest of the economy. I see little evidence that housing is causing an economy wide recession or has made a mistake that need correcting.

It looks like the Economist is guilty of poor analysis and tossing around a lot of terms that it does not really understand.

[Bruce Webb]

Well spencer something is spreading.

Jared Bernstein is having a discussion at TPM Cafe about the productivity slump. Is the Productivity Miracle History?

Over the last year the productivity series has been revised and rerevised in ways that have produced a very ugly numbers series (the BLS server is down right now or I'd link) and the GDP numbers are not much prettier. I get a little nervous when either drops below 2.0%.

[Bruce Wilder]

robinia: "I always thought that the "winds of creative destruction" were thought to be caused by the disruption of the market equilibrium that came about when an innovation caused volatility in the price of a given industry's product, not a result of an overall business cycle effect"

Schumpeter took the view that waves of related innovation drove business cycles. Schumpeter reasoned rather poetically from a circular flow framework, imagining that, in the absence of innovation, the flow would settle into a stable equilibrium. Innovation, in Schumpeter's view, drew resources away from their accustomed applications, perhaps by bidding up their cost, and then introduced new products into the market, depressing both the prices of competing products and the value of the resources and resource structures dedicated to producing the now-obsolete product -- in the circular flow metaphor, Schumpeter saw entrepreneurship as cutting new, deeper channels, drawing the flow away from older, shallower ways. The structures of the (micro)economy, thus, had an organic character in Schumpeter's telling: a vigorous youth of nurturance followed by muscular growth, followed by an indefinite middle-age of established power and apparent permanence, followed by either sudden death or prolonged decline and decrepitude, as the case might be determined by a subsequent generation of innovation.

Schumpeter championed the notion that the booms and busts of business cycles were associated with coincident patterns of innovation. As a paradigm of innovation took hold, entrepreneurs would draw resources into the new forms, creating a boom, before the old forms began their decline, dumping their discarded resources in a bust. Critical innovations tended to begat vast investment in whole new systems structuring economic life, and those investments might continue in a series of waves over a long period of time, with characteristic changes in perceived risk as a particular pattern of business investment became regularized, and so on. Schumpeter labored long and hard to detail various types of waves, enveloped one inside another: Kitchin waves inside Juglars inside Kondratiefs, the last representing a grand sixty or seventy year cycle, explained by seminal innovations -- canals, textile machinery and steam engines (1765-1825); railroads, steam ships, telegraphs and steel(1825-1895); international industrial corporations, electricity, petroleum, autos (1895-1970); computers (1970-?)

Schumpeter, if pressed, might suggest that recessions and depressions, were related to his cycles of innovation and their effects on fluctuating investment demand to employ resources, with the worst coinciding, somehow, with the downside of several of his intermeshed cycles of different lengths. But, the truth is that Schumpeter was not that "objective" in his analyses: he loved the economy and his vision of its intricate complexity, and his laissez faire politics rested on a desire that no politicians should molest his beloved.

I think there are some important truths embedded in Schumpeter's view of cycles. For the U.S. today, it is realistic to see that some of the critical elements of the economic structure we've been building out for 30, or 70 or 100 years are played out. The projection of a national median home price decline for the next two or three years -- the first national decline since WWII -- ought to clue us in to an economic significance to recent developments that go beyond merely tactical circumstances and talk of an ill-advised housing "bubble".

[James Killus]

When robertdfeinman says "Some people like recessions for moral reasons," I think he's on the right track. Everyone is looking to punish someone right now, and since The Economist has fallen under the sway of those who confuse the Invisible Hand of the Market with the Invisible Hand of God, they are projecting whatever frustrations they are feeling onto a desire for recession. And since The Economist started out supporting George Bush and his wars, I'm sure they have a lot of frustrations to project.

[im1dc]

"Does America Need a Recession? Of Course Not..."

The question and title are misleading b/c they are fallacies and completely irrelevant to the facts.

What has happened is a Fed bailout of Wall Street's Big Banks.

The FedRes bent the rules for both Citigroup and BofA this past week to supply them with cheap money, i.e., keep them solvent and operating normally.

Does your lender ever seek you out to lower your unsecured loan's rate of interest for you? Do they insist that you take the lower cost money when if you are having a tough time paying your obligations?

Of course not. That's not Capitalism.

What the FEDRES accomplished is propping up the screw ups instead of sweeping them aside to make room for those with actual merit.

I want to know if that is considered a good and desirable outcome in Capitalism? I know it was in Communism.

And since I know what Communism failed and continues to fail to accomplish before succumbing to Capitalism's promise and realism in both the former USSR and China I surmise this is ultimately a very bad Economic signal for Americans.

[im1dc]

Fred Thompson see's what's wrong with the USA today (GWB, his enablers in Congress and the feckless power hungry professional DEMS) and it dovetails quite nicely with what I have been saying about Economics, Politics and the USA.

August 25, 2007

Fred: Sober and Serious

INDIANAPOLIS — Fred Thompson thinks the country faces a tough road ahead and he's not glossing over the problems we face. In fact, he's anxious to outline the daunting litany and appears to be basing his forthcoming campaign on the assumption that his party shares the same outlook.

In a 25-minute after-dinner speech to attendees of the Midwestern Republican Leadership Conference here, Thompson offered a stark assessment of what he described as America's perilous condition.

"I simply believe that on the present course that we're going to be a weaker, less prosperous, more divided nation than what we have been," Thompson told the crowd in a deep baritone that rarely strayed from an even tone. "I do not say that lightly, but I think it's the truth. And I think the American people are ready for the truth."

There are three major challenges, Thompson said, and none are being given appropriate attention or sufficient commitment. National security ("our country's in danger; it's going to be that way for a long time to come"), the economy ("we are doing steady damage to our economy, that if we don't do things better it's going to result in economic disaster for future generations") and the polarization, cynicism and incompetence gripping the capital ("in order to have leadership you got to have somebody who's going to follow; our people follow, but they don't have any confidence in what's being said or who's saying it")...

link: http://www.politico.com/blogs/jonathanmartin/0807/Fred_Sober_and_Serious.html

[anne]

"(our country's in danger; it's going to be that way for a long time to come)"

Definitive Republicanism; we must always and forever be afraid, no doubt $642 billion for defense not counting Iraq is not nearly enough to, say, be willing to take in a film tonight.

[ken melvin]

Hundred year old buildings stand testament to past booms in cities world wide. Sometimes, the only good thing to remain of the times. There's a problem, I'm convinced of some scale, a few of the people own most of the houses, thus shutting out more and more. With2 bedroom tract selling for $750 in SF's Sunset, where to those making $60k/yr live? What long term, overall good for a few hundred to each own 5-6 houses?

[anne]

"(we are doing steady damage to our economy, that if we don't do things better it's going to result in economic disaster for future generations)"

Interesting that Republicans, including even Fred Thompson, were in control of the White Hourse and Congress for the last 6 years. Doing steady damage to our economy, I suppose. Thompson must be planning to run as a Democrat.

[anne]

"...and the polarization, cynicism and incompetence gripping the capital...."

And, there we have the effects of compassionate Republicanism. Say, New Orleans? Say, Iraq? But, why go on indefinitely?

[anne]

"What has happened is a Fed bailout of Wall Street's Big Banks.

"The FedRes bent the rules for both Citigroup and BofA this past week to supply them with cheap money, i.e., keep them solvent and operating normally."

What happened was that neither Citigroup, nor Bank of America, needed to use the discount window, and were not and are not in the slightest need to be bailed out or in, but the Federal Reserve was using the discount window broadly in a calming show of the possible liquidity stream. There was no problem with Citigroup or Bank of America.

[One Salient Oversight]

As far as my economic history takes me, my understanding is that the "boom-bust" environment was pretty normal throughout the latter half of the nineteenth century and into the twentieth. This sort of situation led to massive booms and damaging busts (which were sometimes associated with stock market rises and falls but not all the time) and only a rudimentary understanding of inflation control.

From the depression onwards, it is my understanding (though I may be wrong) that policy makers have focused specifically upon the removal of this "boom-bust" environment with attempts to "flatten out the curve" as it were.

I'm reasonably certain that more action needs to be undertaken by policy makers to flatten out that curve. I would much rather have slow, steady economic growth without recessions.

As I've said in previous posts, I think monetary policy has to be stricter. Price stability must be defined as prices that remain at the same level, year after year, rather than having an allowance for any inflation. I believe that central banks should aim at zero inflation - with any deviation into either inflation or deflation dealt with accordingly.

I believe this will result in the following:

1) Zero inflation means that money will become more valuable than it is now. Household savings rates will increase and people will be less likely to involve themselves in damaging debt levels.
2) With zero inflation, interest rates will be relatively higher than what they are now, forcing the market to only invest in ventures that can outperform the cash rate.
3) Less market volatility - companies with cash in the bank and proven records of profitability will have reasonable share prices.
4) No chance of asset-price inflation, but rather incremental rises in assets according to their real usefulness.

[im1dc]

anne, you are 100% correct imo about Fred Thompson's remarks in regard to the current regime inside the Beltway and housed in the WH.

That speech separated him from the field.

That ought to have been the number ONE political story this weekend and I hope it will be yet this week.

In effect Fred said George II is not wearing any clothes.

Why the deafening silence from the MSM?

But you are 100% incorrect imo about Citi and BofA, they wailed like babies and got fed by the FED.

The FED did this to stop the actions Citi and BofA would have had to take to have sufficient capital to do ops (selling assets, calling loans and refusing to offer/honor loans even to the credit worthy) which would have had ripple effects throughout the economy.

You are correct that CITI and BofA are not in danger of bankruptcy, but they did not have sufficient cash to do continuing ops. To raise funds they would have put ALL other American financials at risk.

That's what calling loans and not making good loans can do to the economy in extremis. Recall the causation of the Great Depression was mostly that money dried up, many banks closed and others stopped making loans.

Thus, the FEDRES's act of bending the rules to allow CITI and BofA to get low cost loans from the FED window (lower than other banks) was an act of obvious FEAR..

I expect nasty unintended consequences from such interference to the economy.

But I do like your cheerleading, although its the 4th Quarter with seconds to go and your team is behind a few hundred billion $.

[anne]

There is no cheerleading, and I am worried and do not understand the run of economic conflicts that you rightly perceive. Should you be right about Citigroup and Bank of America, and I promise I will make a point of knowing, then I have missed an important banking problem I would have completely dismissed.

Thank you, but I was told with emphasis that it was the Federal Reserve which initiated the use of the discount window by the lead banks. Wait a while.... Darn.

[sa]

I lie on the right side of the political spectrum and think this is one of prof thoma's best posts.

[Robinia]

Thanks, Bruce Wilder-- it all comes back to me again, now, reading your excellent synopsis (am no expert, and it has been quite a while since I read Schumpeter). Point being that innovation is, in the Schumpterian view, driving the circles, by causing the old and played-out to succumb to the new and more effective/efficient. Not the supply of money or credit. But, I suppose, what is a cycle to one (long waves) may be a cycle of a different sort to another (bull-bear).

I like the poetry, although agree that it is maybe not so empirical in the modern day. But, I especially like the idea of innovation developing a chink in the oligopoly and status quo-- winds that bring change.

[anne]

Right; you are completely right and I failed to understand the Federal Reserve's worry of a fear that normal use of the credit markets by Citigroup and Bank of America would have been successful but further limited credit opportunities by less significant borrowers. Darn, that was important and were it not for you I would have missed the the reasoning and danger involved.

Thank you; and reading my own words I should have recognized the weakness of the rationale I accepted. Logic works, when used.

[Bruce Wilder]

One Salient Oversight: "I believe that central banks should aim at zero inflation - with any deviation into either inflation or deflation dealt with accordingly."

Deflation is a lot scarier and more destructive than anticipated inflation. A deflation implies that a unit of currency is worth more in the future than it is today in real terms -- a dollar buys more a year from now than it does today. This undermines the incentive to loan out idle funds -- idle transactions balances swell, and investments with small, but still positive real present value must be foregone, because the rising value of money itself prevents anyone from realizing the real returns on those marginal investments.

Deflation, associated with adherance to the gold standard, was the principle reason for the severe and prolonged recessions and depressions of the thirty-year period, 1867-1896. A rise in the rate of worldwide gold production in the 1890's, due to new discoveries and technological innovation, induced a modest inflation in the gold standard countries , which prevented all but a few transitory banking panics until the First World War. The Federal Reserve's attempts to restrain the speculative fever of 1928-29, followed by an effort to maintain the gold standard, set in motion the deflationary juggernaut, which created the Great Depression.

The mechanism by which deflation can bring on financial panic and economic collapse has already been alluded to. In short, a deflation handicaps the ability of an investor to monetize the full value of the gain from investments to repay a loan, while the prospect of a real gain from holding cash induces those with money to lend, to withhold those funds from the financial markets, depriving those markets of liquidity at critical junctures.

While annoying to historians, a modest, well-anticipated inflation has few concrete drawbacks and some easily identified benefits, which, I suppose, is why central banks, today, generally accept an inflation rate of 2% or so, as either either an official or practical, de facto target. Even a very modest inflation rate is an incentive to those with idle cash to place that cash in the banking system, where it can do some work (and, of course, earn interest to offset the effect of inflation).

0% inflation is not considered as a practical target, because central banks believe their leverage over the financial markets is substantially muted by emergence of deflation. Again, deflation makes holding idle cash profitable; consequently, having the central bank just add to the money supply does not guarantee that financial actors will do anything other than just sit on more idle cash, with no effect on the real economy. One rationale for the ~2% target rate is the belief that it provides a sufficient cushion for the central bank to react to the emergence of a deflationary trend, before actual deflation could take hold.

I hope this layman's explanation is helpful.

[Peter Schaeffer]

All,

I don't favor deliberate recessions any more than does our host. However, I have doubts about whether this country can escape from the hole it is in without one. We have a gigantic trade deficit and exorbitant consumer debt (yes they are linked). Fixing these woes requires spending less and exporting more.

Spending less is likely to be a consequence of higher interest rates and falling property prices. Exporting more will require a sharply devalued dollar. A lower dollar will put pressure on the Fed to raise short term rates to control inflation.

To state this directly, I am not sure if an adjustment path from America's current profligacy to fiscal sanity can be devised that doesn't include a downturn. I have seen international studies of countries with large current account deficits. Rectification typically included some number of years of slower growth.

[knzn]

“Sure, conditions will be tight in recessions - that's the traditional creative destruction story - but things are tight in a competitive equilibrium too and the pressure to innovate does not disappear just because the economy is operating at full employment.”

As I recall, in some New Keynesian models, it is specifically during the booms and not during the recessions, that competition is tightest. The reason you get a boom is that demand is high enough at current prices to get monopolists to produce more but not high enough (given the menu costs) to get them to raise their prices. So a boom is specifically when firms behave most like competitive firms, and a recession is the opposite, when firms behave most like monopolists.

[Bruce Wilder]

Robinia: "Not the supply of money or credit."

Thanks for your words of praise. I would be remiss, though, if I did not point out that Schumpeter believed that money/credit mattered, and a lot. In this, he differed from the true Austrians, who insist that the real economy is immune from the seductions of mere fiat money.

Schumpeter and Keynes agreed on one significant point: both regarded the normal state of the financial markets to be awash in funds. Interest rates, in their common view, do not reconcile a supply of savings with a demand of investment opportunities, and it is wrong to imagine that interest rates are a market price with the function of inducing savings. In the Schumpeterian view, the interest rate was all inflation and risk-adjustment -- the often futile effort of bankers and the wealthy to avoid destruction in an unavoidable transaction with an on-rushing future, where the value of whatever one holds is subject to erosion and submersion.

For Schumpeter, the elaborate financial system of capitalism was critical to the power of the enterpreneur to build new structures, for two reasons: first, it allowed excellent score-keeping, which recognized and valued the rent-enhancing effects of even small, incremental gains in technical productivity, and second, and most importantly, the financial system allowed the magnification of prospective rents from innovative increases in productivity into massive present value and the financial power to forcibly re-allocate resources into new structures. A successful entrepreneur -- Cornelius Vanderbilt, Andrew Carnegie, Thomas Edison, John D. Rockefeller, Henry Ford -- could be elevated from nowhere from even a modest local success by the financial system's capacity to make him, overnite, into a Titan commanding vast resources to replicate and extend that success, because the financial system could monetize in the present moment anticipation of rents to be earned in the future. (And, of course, as those rents might actually be realized, their embodiment as monetary wealth could be recycled to finance the next wave of innovation.)

[dWj]

A better question might be "which steps are worth taking to avoid recession", or something of the sort. When economic resources have been targeted to the wrong thing in a large way, the best way forward is a reallocation, and that's going to involve a fair amount of dislocation. Steps taken to prevent the reallocation are not in our long-term interests, but sober monetary policy is more likely simply to make the transition less painful; even the recent Fed moves, by way of B of A and Citigroup, to support the market for higher quality mortgages seems unlikely to overinduce investors to keep pouring too many resources into residential fixed investment.

Incidentally, I think Professor Thoma's point on #3 was spot-on, and also holds for the Fed put: If the fed is thinking, "a 25bp cut would restore neutrality, but would still leave investors with big losses, while cutting rates 50bp would be a bit inflationary but would soften the blow to investors," their job is to cut rates 25 bp. This will reduce the losses experienced by investors, but the response of investors to this will be exactly appropriate; a cut of 50bp would both create moral hazard problems and sow the seeds for the next inflationary episode.

[knzn]

Basically, the Economist’s argument about moral hazard is that, if you are in danger of doing something perfectly, you should deliberately make mistakes in order to avoid becoming overconfident.

[gordon]

So, nobody wants a recession, but nobody can work out how to prevent one without bailing out those who have created the potential for one to occur. Nobody wants to let them completely off the hook, but since they can effectively threaten the whole US with dire consequences if not bailed out, they get bailed out. Wow.

[A Sample]

Actually sir, it is Capitalism because the FED acts in the name of the capitalists. Except the capitalists have created a oligarchy. It is what is is.

[Bruce Wilder]

knzn: "Basically, the Economist’s argument about moral hazard is that, if you are in danger of doing something perfectly, you should deliberately make mistakes in order to avoid becoming overconfident."

I used to work for a brilliant businessman, who advocated a policy in almost exactly those words.

His argument was that you can only learn from mistakes, and if your business strategies, as embodied in routines and policies, do not retain tentativeness and testing -- if you choose "perfection" in one moment -- you will be flying blind in the next.

Offered without endorsement.

says...

"To the clear-sighted, failure was the only goal."

TE Lawrence

[dug]

One sign that a recession is indeed coming is that people (first Andy Xie now the Economist) are starting to advocate it. We heard similar "purge the overconfidence" talk in 1999-2000.

What I have never understood is why an excess of capital required that labor become unemployed.

Why not, instead, ensure that the price of capital (housing) fell, allowing labor more capital to work with and effectively increasing their real wage?

Oh, right, because the owners of that capital (or in this case, housing and the derivative securities backing them) are so leveraged that they hold on and hold on, refusing to take their lumps in the mark-to-market moment. And usually they have the political power to get away with it

[Lafayette]

MT: I disagree that we need recessions to have a dynamic economy.

Eminently sensible

And, I maintain they are inevitable. No country has suspended the law of cyclic economic activity. We (i.e., the Fed) cannot micromanage macro-economically the economic activity of the nation without avoiding two consecutive quarters of GDP decline (the standard definition of a recession).

The Economist is proposing that we try to manage a cyclic activity that is a "given", not that we should try to bend it unwisely into a linear progression ad infinitum.

There are serious imbalances in the American economy. The article names only three -- without pointing a finger at the proclivity of Americans to live permanently in the present with a disdain for the lessons of history and a disregard for future uncertainty.

America has systematically proven itself incapable of managing a chronic imbalance of payments that goes back decades? Why? Because it is addicted to foreign products.

Americans have proven themselves inept at saving because of a hell-bent consumerist proclivity - to have it all and have right now. This means they are living at the very edge and at the first sign of "a tipping point", off the economic cliff they dive. There is no savings cushion waiting for them below. (They transfered savings to equity investments; whereas the former remain constant the latter dive in a recession. Remaining savings are tied to residential property and therefore illiquid - people must live somewhere.)

America is living off borrowed time. It has mortgaged its future foolishly to an old enemy by allowing the accumulation by that country of a massive amount of dollars with which it can manipulate the American economy. The very sovereignty of the US is financially menaced.

All the above are hallmarks of extreme naiveness in matters of cyclic economic activity and national priorities as well as strategic directives.

Given the enormity of the menace, the Economist's suggestion that managing closely a few minor recessions, to clear the economy's pollution in order to avoid a major future catastrophe, seems eminently sensible.

[Lafayette]

I_S: Nouriel Roubini argues convincingly that the Fed responds assymetrically to asset price increases: It ignores or denies them while inflating, then eases when they deflate.

Writing rubbish

This is wrong. The Fed does nothing of the kind. Roubini is writing rubbish to stimulate his blog activity and you are repeating it in another blog as "arguing convincingly".

The Fed does not ignore but watches carefully asset price increases AND THEN steps in when they exceed limitations that the Fed Board has self-imposed as consonant with proper management of financial markets. This action stems from regulatory policy, not market micro-management.

The past two messes (the dot.com boom/bust and the sub-prime loan) did indeed SEEM to be laxity in oversight of the Fed regulation/supervision of markets (under Greenspan's leadership).

But, such is very different from the Fed reaction that Roubini calls ineffective ... meaning employing monetary policy to correct them. The dot.com boom was an equity feeding frenzy that the Fed should have abated in what manner, pray tell? Forbid margin sales? Forbid stock options? Increase capital gains taxes on short-term selling? I ask, has it the Fed authority to take these actions? Only as regards equity margin sales, which assisted the frenzy but did not cause it.

The sub-prime mess IS manifestly a lack of oversight on the part of the Fed in the matter of supervising lending operations by credit institutions. But, this is regulatory responsibility and not ineffective use of monetary policy, the use of which finally calmed the markets but in no way alleviates the problem in the markets -- but still leaves the core problem of debt in existence.

No government intervention is going to assume that bad debt. Neither should it.

The Fed is only one element in the financial system. It is there to police/influence financial markets, not manage them. It is difficult enough to understand what is going on without muddying the financial waters.

[Bailey]

Hey Gordon, I WANT A RECESSION!

[wjd123]

Some random thoughts after reading Robinia post on how the leverage of mature firms can "inhibit the the gales of creative destruction."

If these companies are involved in global markets than subsidies should not be allowed under WTO rules. Enforcing such rules would be an example of an international organization keeping comparative advantage honest. However the WTO can't do anything unless a member complains. In many cases it is wise for corporations not to complain. Why get the ball rolling against tax subsidies if they can be favorably leveraged. Comparative disadvantage can be made to pay dividends. When a competitor--particularly a foreign competitor--gets a package of goodies to locate in one state it's easier for competitors in different states--particularly domestic competitors--to ask for their own package of goodies less they be put at a comparative disadvantage. I guess that's called serial corporate welfare disguised as fair competition. The ability of huge companies to extract corporate welfare can lead to price advantages that make it harder for a better mouse trap to compete or easier for a corporate buy-out.

WTO definition of subsidies.

Types of Subsidies: A subsidy can be almost anything a government does, if the following conditions are met: (1) a financial contribution is made by a government or public body and (2) a benefit is received by the company. Trade rules permit remedies in circumstances when subsidies are "specific" (i.e., provided to a limited number of companies, such as all exporters) and have caused adverse trade effects. Subsidies can take a variety of forms....

I'm interested in ways that internationalism based on trade can be used to improve civil rights and end abusive practices.

I also think that globalism leads to economies of scale that foster monopolies. I was encouraged to see that there were some limits on competitive advantages due to scale. I think economist need terms to encapsulate such limits so they can be more easily discussed.

For example, economists need a term that describes the phenomenon of a company that enjoys an economy of scale, like Wal-Mart, using its clout to squeeze the manufactures they deal with to a point where they cut corners which in turn leads to huge recalls and billion of lost sales for the retailer they supply.

Let's see, if what Wal-Mart is doing could be described as a corporate shake-down perhaps this global phenomenon could be called a corporate shake-up. No, I like the idea of a double entendre but it's also confusing. How about a supplier shake-up? No that's lame. I'm getting nothing. I'll leave it to more creative minds or more knowledgeable ones to come up with a name to encapsulate this concept. How about "a squirt in the eye." No, no, no, not economicy enough. "Supplier ataxia." It's always handy when looking for a new term to use Greek or Latin, of course, no one knows what your talking about, but it helps the sale of foreign language dictionaries. Oh, forget it. "Dilemmas of scale." Help! I can't stop.

[im1dc]

anne

Here's an article that adds another layer of understanding of the current banking turmoil.

As you can tell from its title the author agrees with both of us. :>)

The takeaway imo is UNCERTAINTY is roiling the credit markets and will for the 4 quarters (Dash says 2 Q but I say 4 Q).

Bank Profits May Well Suffer, but Credit Crisis Hardly Leaves Them Defenseless

By ERIC DASH, August 27, 2007

link: http://www.nytimes.com/2007/08/27/business/27bank.html?ref=business

[im1dc]

A Sample says...

"Actually sir, it is Capitalism because the FED acts in the name of the capitalists. Except the capitalists have created a oligarchy. It is what is is."

Good post but you neglected to add "Gotcha!"

[Barry]

Mark Thoma: "...and the pressure to innovate does not disappear just because the economy is operating at full employment.

So I don't see why a full-employment equilibrium cannot also be a dynamic economy."

I don't think that it's a coincidence that right-wing rags really don't like a full-employment economy. They see business innovation directed to using employees in more intlligent ways (not simply squeezing), and in taking care of employees, and they shudder.

The *like* recessions, for the labor discipline that they bring.

[im1dc]

anne

A shoe drops:

Mortgage Crisis Forces Sale of German Bank

link: http://www.nytimes.com/2007/08/27/business/worldbusiness/27german.html?ref=business

[Peter Schaeffer]

Barry,

You may have been correct 100 years ago...

However, it looks like Wall Street is terrified of a recession right now.

Probably for good reason.

[im1dc]

anne

Sorry to be such a bother this morning but right now on CNBC two analysts, one from Wachovia, are telling the viewers that Commercial Real Estate is facing a 5% to 10% decline in RE value and REIT's to decline 10% due to the Mortgage mess.

Their assessment is based on their estimates that easy money created overvalued Commercial RE by up to 25% "in hot markets".

However, neither analyst expects too many defaults to result from the lower valuations and do expect most Commercial RE and REITs to weather the coming devaluations.

CNBC entitled this segment "Next Shoe to Drop".

[Bruce Webb]

lm1dc "What has happened is a Fed bailout of Wall Street's Big Banks.

The FedRes bent the rules for both Citigroup and BofA this past week to supply them with cheap money, i.e., keep them solvent and operating normally."

Two stories are being conflated here and so creating confusion. One is the change to the Discount Window with the rate lowered to 5.75% and the term to 30 days. The big banks did go there but more or less just to signal confidence.

The second story is outlined at CNN Money here; Fed bends rules to help two big banks This had nothing to do with the Fed supplying cheap money, it was to relax rules designed to limit how much of these banks abundant capital can be lent to their own mortgage units. Quite a different thing.

The regulations in question effectively limit a bank's funding exposure to an affiliate to 10% of the bank's capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, "that represents about 30% of Citibank's total regulatory capital, which is no small exemption," says Charlie Peabody, banks analyst at Portales Partners.

The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible.

In contrast the total amount accessed at the discount window by these banks? On Wednesday, Citibank and Bank of America said that they and two other banks accessed $500 million in 30-day financing at the discount window.

Big difference between $500 million total borrowing and $25 billion each of lending approval.

[anne]

IM1DC

Thank you :) I am paying attention, but not understanding enough to reasonably repond. The question for me is whether the slowing in housing will lead to a recession which will further weaken mortgage payments even if short term interest rates are cut in stages by the Federal Reserve. Short of a recession, my sense is that cutting short term interest rates can protect the mortgage market sufficiently to limit financial industry difficulties, especially given the diverse even international holding of mortgage packages that seems to be the case.

But, I do not understand enough to feel in any way confident for the time.

[im1dc]

Bruce Webb

Thanks for the CNN story, I missed it.

However, that is in ADDITION to the NY FedRes Bank restating Bernanke's 5.25% rate to 'averaging 5.25%'.

No other FedRes Bank did.

IMO, that's a Wall Street Money Center Bank bailout. Of course, others including Bernanke, Peterson and Bush would say that it is the FEDRES doing its job.

The NY FEDRES lent at less than 5.25% to CITI and BofA. And probably to the other Money Center banks mentioned in the CNN article.

It makes sense, if you want to prevent those banks from being forced to stop loan operations and sending ripples throughout the financial system and economy.

FYI This week the FedRes is going to the markets to sell #134 Billion in Debt, $94B in Bonds, Notes and Bills and the remainder in other GOVT obligations according to Rick Santelli on CNBC.

[David Beckworth]

Let's step back for some historical perspective. As I noted in my blog, Paul Volker as Fed chairman allowed--some would say engineered--a recession in the early 80s to lick inflation. This 'double dip' recession was a particularly painful one, but most observers in retropsect view it as improving the macroeconomic environment that fostered the long booms of the late 1900s. Could this be a case of a 'cleansing' recession?

(I raised this question earlier on my own blgo at http://macromarketmusings.blogspot.com/2007/08/blog-post.html)

[im1dc]

anne & Bruce Webb

About that housing data, reality is far different from current perception. Sit before reading:

From Barry Ritholtz:

New Home Sales= Zero Gains, +/-

Monday, August 27, 2007 | 11:49 AM

"The U.S. Commerce Department said Friday that new home sales rose 2.8% in July after falling 4% in June."

That was how most of the MSM covered Friday's New Home Sales.

The problem is, it is not correct."

link: http://bigpicture.typepad.com/

[im1dc]

A Sample says...

"Actually sir, it is Capitalism because the FED acts in the name of the capitalists. Except the capitalists have created a oligarchy. It is what is is."

James Grant of "Grant's Interest Rate Observer" disagrees with you and comes to my rescue.

Read:

"Capitalism without Financial Failure is Not Capitalism at All"

Monday, August 27, 2007 | 07:19 AM

Quote: "Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.""

emphasis added

link #1: http://www.nytimes.com/2007/08/26/opinion/26grant.html

link #2: http://bigpicture.typepad.com/

[im1dc]

David Beckworth says...

"...Could this be a case of a 'cleansing' recession?"

Professor Bechworth, Jim Grant's quote was also intended as my poorly informed answer your question:

..."Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.""

Although, I disagree with Grant and believe the Chairman won't be able to resist interfering in the workings of Capitalism's constipated markets which imo will ultimately make matters worse from such intervention's unintended consequences.

[im1dc]

anne, bruce wilder

anne, there is more hitting the proverbial fan.

Bruce, read the bottom 5 paragraphs of this article which clearly explains why the additional special $25 B lending authority was given to CITI and BofA.

Please note that authority is a separate event from the NY FedRes's special lower than 5.25% Fed Window rate given to CITI and BofA.

Wachovia Sues Mortgage Specialist Firm in Dispute Over Collateral

By BLOOMBERG NEWS Published: August 25, 2007

The Wachovia Corporation, the bank based in Charlotte, N.C., has sued the jumbo-mortgage specialist Thornburg Mortgage for failing to return collateral used in a derivatives transaction.

Wachovia, in a complaint filed Thursday in Federal District Court in Manhattan, said that Thornburg had not returned $5.12 million that it owed since Aug. 13 after the companies agreed to unwind a series of interest rate swaps, the bank said in a complaint filed Thursday and made public yesterday.

The complaint states that Thornburg is “willfully” breaching an agreement to return the money and that the company had said it intended to “pay other, unrelated counterparties with which it has established business relationships before it pays Wachovia.”

Thornburg, which stopped taking loan applications this month because of a cash shortage, sold $20.5 billion worth of securities at a discount last week to pay down debt it could not refinance. The company said it would record a $930 million loss in the third quarter on the sale, resulting in a probable net loss for the year.

“We are surprised by Wachovia’s complaint,” a Thornburg spokeswoman, Suzanne Lopez, said in a telephone interview. “As previously agreed to by both parties, Thornburg Mortgage will fulfill its obligation to Wachovia” on Monday.

Also yesterday, the rating agency, Fitch Ratings, cut its mortgage servicer assessments of the Countrywide Financial Corporation and GMAC because of challenges to their “liquidity position and financial flexibility.”

And the Bank of America Corporation said yesterday that it had received an exemption that allowed it to borrow up to $25 billion from the Federal Reserve for providing credit through its affiliates to clients like hard-pressed mortgage lenders.

The bank, which disclosed the exemption in a regulatory filing, has not yet made such transfers. It was granted the right by the Federal Reserve Board of Governors on Sunday, a Bank of America spokesman, Robert Strickland, said.

On Monday, Citigroup was granted a similar exemption for $25 billion, the Fed secretary, Robert de V. Frierson, told Carl Howard, the Citigroup general counsel, in a letter.

Transfers to securities affiliates make it easier for banks that have large Wall Street operations to finance the mortgage lenders. Lenders have found it difficult to raise cash as investors shun mortgage-backed securities because of rising defaults by borrowers.

link: http://www.nytimes.com/2007/08/25/business/25lend.html?dlbk

[gordon]

Bruce Webb says: "...the change to the Discount Window with the rate lowered to 5.75% and the term to 30 days. The big banks did go there but more or less just to signal confidence".

Well, somebody is borrowing more than that at the discount window. The Federal Reserve report Factors Affecting Reserve Balances for the week ending Aug. 23 2007 seems to indicate (at the heading "Loans to Depository Institutions") an average daily lending of about $1.5b. through the discount window - unless I'm reading the report wrong, which is always possible.

[Stefan Karlsson]

I have replied at length to your arguments here:

http://stefanmikarlsson.blogspot.com/2007/08/mark-thoma-vs-economist.html

[Stefan Karlsson]

Evidently, the URL was too long, so click here.

[Patricia Shannon]

As someone who has been out of work in some previous recessions, I have noticed that those who advocate recessions as being helpful, never voluntarily become unemployed themselves, and don't volunteer to work w/o pay.

[Patricia Shannon]

The people I think should be punished are those who enticed people who are not financial experts to take on loans they were unlikely to be able to keep up, eg., with balloon payments or sharp increases in interest rates.

I agree our country is dedicated to unrealistic, and often harmful, degrees of optimism. If one points out that our country has problems which we need to work on, we are accused of being unpatriotic. After Bush has shown so strongly the dangers of excessive optimism, we have books coming that tell us all we need to do is imagine what we want, and we will get it.
Barbara Ehrenreich says it better than I can at
http://www.barbaraehrenreich.com/hope.htm

[Bill]

We do not "need" a recession, but will probably have to go through at least a mild one. Subprime borrowers and lenders are getting "punished" and will continue to be since the interest rate they need to escape that is probably 1%-2%. What the economy needs is to transition workers from housing (whether carpenters, realtors, mortgage brokers, land developers or whatever) into other productive sectors (I guess probably anything that can be exported given the size of the trade deficit). In a textbook, that just happens in reaction to the changes in pricing. In real life the transition takes time and is not smooth. An accountant for a housing company will make a quicker transition than a plumber (become an accountant in another industry). The down time that this transition takes will be the recession. If we could magically retrain and re-employ all the excess housing folks overnight, we should and it would be good for all of us. There would be no recession and the investors who bought the B pieces of various MBS would still have lost a fair bit of money - their punishment.

[reason]

Stefan Karlsson...
interesting post on your website, but I don't think you have really addressed the fundamental issue within the Keynesian critique. That is that secondary financial effects (essentially loss of confidence) will inhibit healthy growing industries in the short runs as well as those that have over expanded.

I have the feeling that the currently financial world (where financial flows regularly overwealm normal goods and service flows) is something that theory (of all schools) doesn't really have under wraps. The sheer size of all financial instruments (especially derivatives) combined with their potential volatility frightens us all.

[Lafayette]

Rob: "I always thought that the "winds of creative destruction" were thought to be caused by the disruption of the market equilibrium that came about when an innovation caused volatility in the price of a given industry's product, not a result of an overall business cycle effect."

I doubt Schumpeter would be so lax in his definition. He really did mean the word "destruction". (Destruction: the action or process of causing so much damage to something that it no longer exists or cannot be repaired)

The internal combustion engine replaced the horse and wind power in transportation. No, horses where not destroyed, but they became obsolete for the purpose of mass transportation. An industry died, to be replaced by the birth of another. I suspect this is what Schumpeter had in mind.

There are numerous examples of this industrial phenomenon, the above being the most pronounced. When applied in an financial context, one could perceive the correct remedy for the sub-prime mess to be the demise of the credit industry. But, we know that wont happen. It will morph, hopefully, into something more benign and less harmful.

Is a recession "creative destruction"? When a recession becomes a depression, the cleansing is thorough. So, yes the can lead to creative destruction. However, recessions need not arrive at such thoroughness.

They must remedy an illness, but not at the expense of the patient's demise. Unfortunately, inflation (particularly, asset reflation) is like a cancer. When we think we stopped in one place ... it pops up in another.

This generally means, to my mind, that the remedy employed was not sufficiently effective. We've got a lot to learn about both cancer and economic inflation.

[reason]

Lafayette...
well put, but finance is not just another industry. Please admit it just once, our financial institutions are a mess!

[Lafayette]

reason: but finance is not just another industry.

Well, it is and it isn't.

It's just another industry when looked at objectively. When one has their total net worth tied up financially, then that regard becomes entirely subjective.

Asset diversification means investing across a range from liquid to illiquid investments (that is spreading the risk). Illiquid investments are typically long-term real-estate (meaning personal residence) ... except when the asset is steeped in debt, which is always risky. That debt must be paid, regardless of the asset's market value.

Highly liquid investments are the stock market. The risk is long-term low (historically) but near-term high (due to volatility). Why? Because equity markets have gone global and expanded equity ownership exponentially in the past twenty years.

The world of asset management is amazingly complex, admittedly. Which is why the naive should not be fiddling with it. Asset management is for professionals.

I have belabored in this forum to underscore the necessity of not taking economics personally. A subjective judgment colours everything ... and usually the wrong way.

Which is easier said than done ... evidently. Because most posters have only a passing knowledge of economic fundamentals. So, we are getting a lot of chaff (interesting as it may be) with a small amount of wheat grain (posts anchored in a knowledge of economic theory and liable to stimulate debate).

Still, it's a public forum and all have the right to say what they want. The challenge is in seeking the nuggets.

[reason]

Lafayette...
NO it is not just another industry. If it was then we could tax its output, not just its profits.

[jan perlwitz]

"Does America Need a Recession?" is the question.

Do we need gravity?

Does New York City need a seasonal weather cycle?

The question already doesn't make sense to me. Of course, mainstream theoretical economy is founded on the equilibrium paradigm (or dogma?) without any understanding about recessions. Capitalist economy is thought to tend to equilibrium, if everything is done right by its participants, and recessions are supposed to be the result from some external disturbances which can be avoided. As if there were any empirical evidence for this equilibrium thinking.

I think mainstream economical theory is just wrong with its paradigm. But mainstream price theory is also a circular one and mainstream theory can't even explain why there is a positive profit in it's equilibrium economy integrated over the whole system. Thus, one flaw adds to another one.

My opposite point of view is that capitalist economy is not an economy which naturally tends to equilibrium. On the contrary, its natural state is non-equilibrium. It's an highly non-linear system, in which any equilibrium is a non-stable one at maximum, a system which goes through irregular cycles or, perhaps, even moves on a the trajectory of a chaotic system. Recessions are just a part of the system which can't be avoided. They come with necessity like the effects of the laws of nature, no matter how much any central bank authority fine tunes interest rates or whatever regulations the state imposes.

[Lafayette]

reason: If it was then we could tax its output, not just its profits.

The European value-added-tax does in each step of the transformational process up the production ladder, from supplier to supplier. But, that is recuperated by the companies that resell their products to another company.

When the product reaches retail distribution, then it is the consumer who pays, finally, the value-added-tax.

In the US, must I presume that the transformational process is taxed? When companies sell to another company, that sale is taxed? That's a pity, since it is a form of double taxation, first on the product and then on the profit it generates.

Are you quite sure of this? Interesting ...

Besides, weren't hedge funds relieved of this sort of taxation?

[samuel]

Surveys tend to provoke common actions, a minority will be contrarians, an other will panic and the majority won't act unless consequence stick to their neighborhood.

[Douglas Bayly]

I think we are all missing the point here. A recession is a byproduct of many other underlying events, and true value never dissipates, but is rerouted. The creation of that value stems from positive social interactions, and maybe in this, finding the root of value we can see why in the ebb and flow of the monetary stream their is answers to the global economy. I once stated that the World will not stand by forever watching America presume an elevated postion, and this is to me one of the roots of a coming global economic equalibrium, where the social value created here is worth the same as that same value created anywhere; but here is the catch, in this process sacrifices will be made, and as they become envitable they may cause angst, and in angst is the potential for turmoil. So, the term recession or depression mean little other than they represent key variables in the functioning of future agendas. The man of angst will create social angst which can be aa a seed, from which tomorrow shall emerge, and for the revolutionary social angst is the key to his/her pursuasion. So, in this does it become necessary for the Fed to continually appease the masses, even if this is an impossible task. This is not a product of value structures other than a it is a means to avoid the spoiled man's fall and rebound in tyranny. Controlled social envirionments depend on the perception of value, but in the underground where true future change is most apparent one may witness many wishing to leave a republic, but a smaller version of social governance gone awry can be found in the social experiment conducted by Jim Jomes, A microcosm of larger scale endeavors to control social envirnments, and in this case one of the major signs of social dissentigration or folly was the angst of those on the fringe of the group, the edge where disgruntled turns into reinforcement of angst and subversive behavior begins, in an attempt to create chaos, and in this "chaos" tomorrow is had. Economic indicators can transend into sociology and even give signs into tomorrows tomorrow. The first signs of trouble became apparent as many constituents of the Jone's town community began to seek departure.

Animals who sense turmoil, run or depart, and by watching them we can be forewarned of coming atrocities, is this underlying desire to depart a sign of coming social angst? What of a recession, that turns into tomorrow, one way or the other?