Thursday, March 20, 2008

Cute "A Recession of Choice" phrase by Lakshman Achuthan

You'll recall I mentioned how we chose this depression in 2001. Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, is now echoing me.
Congress and the Federal Reserve missed their chance to keep the country from falling into recession by acting too slowly, according to a well-respected economist.

Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, said the economy has now fallen into what he calls "a recession of choice."

He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall.

Since then the Fed has aggressively cut rates, most recently lowering them by three-quarters of a percentage point at its meeting Tuesday.

"If they had done all this in the fourth quarter, I think we'd be having a different discussion," he said. "We might not have had Bear," he added, referring to the fire sale purchase of brokerage firm Bear Stearns (BSC, Fortune 500) by JPMorgan Chase (JPM, Fortune 500) that the Fed helped arrange over the weekend to avoid a collapse of Bear Stearns.

So, we disagree by about six years, but the basic point is the same. I'm not sure how Mr. Achuthan thinks all that imaginary housing wealth and its dependent financial instruments could have been rescued by a rate cut in the Fourth Quarter, but he agrees with me on the basic issue that the "recession" was avoidable.


nephos said...

Doesn't ever decreasing reservoirs of oil play a role? I mean, if the energy supply goes away, I don't care what the choices are, the economy is hitting the tank.

Rionn Fears Malechem said...

Certainly, it plays a role. All of these macro effects -- climate change, peak oil, the industrialization of China, the occupations of Iraq and Afghanistan, Homeland Security, and this, and that -- play a role in degrading the growthiness of our economy. I was reading a funny article in the Economist today about Canadian oil.

But, the housing bubble/credit crisis was really a crisis of choice. All of those other effects are playing out on their own timescale. Certainly, the changing availability of oil will catastrophically shrink the economy. Certainly, climate change will kill most of us. But, those effects are built into our culture -- they're like a cell death gene expression.

The housing bubble/credit crisis was grotesque financial mismanagement. It didn't have to happen.

nephos said...

As a strong believer in the second law as the underpinning of the evolution of all things, I rather disagree.

The housing bubble would not have been a bubble if it had as its underpinning a corresponding increase in consumption of energy. As it was, that underpinning was not there. So, back in the day, this left those with the power with the option of creating either a temporary, illusiory impression of wealth, or creating no impression of wealth at all. In the moment, was this really a choice? Or is it rather only a natural consequence for a successful species to say things are grand, when they really are not? After all, didn't we willingly go along?

Rionn Fears Malechem said...

It was really a choice. Both the institutional failures that allowed the bubble and the artificially low interest rates that accelerated it were policy decisions.

Home buyers made a lot of individual decisions which look crazy in retrospect. But, we can expect people to act without an appreciation for the context they're in. This is why regulation doesn't emerge naturally and organically.

It's why we have a government.

artt said...

I found a description of the "choice" part of the recession that ECRI was talking about from a Jan. 2008 article:

Rionn Fears Malechem said...

Thanks for coming by the blog, Artt! As a tip, you can use anchor tags in comments -- <a href="">Kirk Lindstrom's Blog</a> comes out as Kirk Lindstrom's Blog. Your URL was too long to be displayed, is why I point this out -- only I could see your whole URL, which was unfair to my myriad of readers.

To the larger point, though, it's sort of like keeping from capsizing as you approach a waterfall. Wait, that metaphor sucks. Maybe more like cutting down a tree and propping it up with sapling boughs. It may be theoretically possible, and it'll work for a time, but you're never going to have enough boughs, and that tree is not going to hold itself up.

The fundamental truth -- fancy dan mutterings about interest rates, the money supply and financial innovation aside -- was that the housing wealth was imaginary. People were being asked to pay too little to ever pay off their mortgages, so affordability lost its power as a constraint. Consumer spending was fueled by the resultant illusion of wealth, actualized in home equity lines of credit. People bought multiple houses, as they kept gaining value and they weren't being asked to pay for them. More houses were built to fill the illusory need, creating real construction jobs that would suddenly vanish.

All that imaginary value was being paid for by real debt, which is spread across the balance sheets of most of our financial institutions. Every time housing values go down, every time foreclosure gains popularity as a resolution, more of those debts go bad. Their crapitude is magnified by this or that, but the our solutions are failures of many of our financial institutions, hyperinflation and bailouts.