Quick Fix, or Delayed Disaster?

There has been a lot of talk in the world about our fledgling economy.  I’d like to address some of the things people are saying.  A lot of people just don’t have a clue what they’re talking about, and can’t see past their own wallet.  I’m here to set the record straight.

Common Comment: “We’re in a recession, whether the government admits it or not”

The Truth: A recession is defined as “two consecutive quarters of negative GDP (Gross Domestic Product) growth.”[1][2][3]  Wikipedia discounts this definition, saying “American newspapers often quote the rule of thumb that a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters. This measure fails to register several official (NBER defined) US recessions.”[4]  However, I take issue with this statement in that looking through NBER’s data on US business cycles[5], they don’t list a period of contraction (recession) lasting shorter than 6 months, which actually gives further credence to the two quarter definition of recession. 

The fact of the matter is, according to the Federal Reserve Bank of St. Louis, which keeps extensive economic data in their FRED system, GDP hasn’t declined for 2 quarters consecutively since 2001.[6]

So to those people who say “We’re in a recession, whether the government admits it or not”, you’re wrong.  Sorry.  The non-partisan, non-profit group that declares recessions, has not done so.  Despite increased unemployment and the stock market’s dismal performance, no, we are not yet in a recession.

 Common Comment: “I want to know what the government is going to do to fix the economy.”

The Truth: Have these people ever considered the possibility that the economy isn’t broken in the first place??  There’s a concept that everyone’s heard of, but few actually understand.  It’s TANSTAAFL: There ain’t no such thing as a free lunch.

First of all, too many people confuse the stock market with the economy-at-large, so I’ll just address that first.  Think about stocks for a minute — every time someone wins, someone has to lose.  Every time you buy low, someone else is selling low.  Every time you sell high, somone else is buying high.  In order to win, someone must lose.  Now, having said that, investors are panicking because the market is down to 9,000 (as of this writing) from the 14,000 it was at this time last year, and they’re saying the government needs to “fix” things.  Here’s a novel concept: nothing’s broken!  Could it be that the market should never have been at 14,000 in the first place?  Could it be that artificially inflated housing prices, caused by low interest rates and government mandated (Community Reinvestment Act) subprime loans given to lower income buyers, securitization of those mortages, and rampant real estate speculation caused the market to be much higher that it ever should have been?  Could it be, that the market is doing exactly what it’s supposed to, and correcting the error?  Maybe people do realize this, and are just so shortsighted that what they want is the government to prop up the market long enough for them to get out without taking a big loss.  It’s not that they think the market needs fixing, is that they’re upset that the market is biting THEM.

Secondly, I don’t think people realize that the economy is kind of a wild beast.  It’s difficult to control, and frankly, it’s not a beast that we should try to control.  It’ll just lash out at us if we do.  There are natural cycles in an economy.  Ups and downs.  The problem with government intervention is that it doesn’t usually help things.  By the time the government sees a problem, decides what to do about it, makes the change, then the change starts to affect things, the economy often has already begun to shift on its own.  Once this happens, the governmental change serves to steepen the movement, making the rollercoaster ride all the more wild.  The irony is not lost on me that when the government wanted to stop short-sellers from manipulating the market, they temporarily banned short-selling, thereby manipulating the market themselves.  Here’s the deal folks, I’m your classic, mostly-laissez-faire kind of economist.  In my view, if the inefficient and all too clueless government would leave the economy alone, the cycles would be less extreme.  They would still happen, but that’s a natural part of economies.  To try to change that is just playing with fire, and now it’s our turn to get burned.

The Bottom Line(s): To get right down to it, the government passed a 700 billion dollar rescue package to buy up troubled assets of banks.  I think it’s a terrible idea!  I’m torn though, because while this kind of government intervention goes against every free market principle I hold to, I don’t see much choice.  The government made this mess when they required banks to offer loans in any geographic area in which they do business, and then under the Clinton administration directed them to use subprime loans to increase home ownership among lower income folks.  Am I the only one that thinks that poor people “owning” homes isn’t a good idea?  Who’s most likely to default on their loan?  People who can’t afford it!  Making up these interest only, zero down, and adjustable rate mortgages just set us up for our downfall.  Because this artifical boon to home sales caused us to be in this mess, the market itself has thusfar been unable to absorb the failure.  On the one hand, I have my principles and what I know about economics.  On the other, there’s the reality that without credit, businesses are going to have a hard time doing business.  (Maybe that’s the real issue, that everyone needs credit to operate…  Anyone remember the old days of a cash economy??)  I’m really uneasy about where this will take us…

To wrap things up, I’m tired of people playing the foreclosed homeowner as a victim.  I don’t believe there’s any such thing as predatory lending.  You either bought a house you could afford, or you didn’t.  If you bought a house with an ARM that you could afford for a few years, while you hoped to sell it for a profit before the interest rate changed on you, YOU ARE NOT A VICTIM.  These people bought homes they could barely afford, or could only afford for short while.  They intended to keep the house for a few years, ride the appreciation wave, then sell it off before their payment went up.  They used their home as a short-term investment, rather than a long-term wealth-building mechanism, and they got burned.  Why should my tax dollars be used to restructure these risk-takers’ mortgages??

Americans seem to have this notion that every one of us deserves to own a home.  No.  We don’t.  We deserve to have that for which we can afford to pay.  I don’t own a home.  Why?  Because I can’t afford one yet.  This is a concept I wish more American’s would get through their heads.  If you have a fixed-rate mortgage, at a monthly payment you can afford, then there’s no reason you should have to foreclose (unless your income decreases for some reason and you don’t have enough savings to float yourself — though I could argue this is still your own fault).  If you don’t fall into that group, then I have precisely zero sympathy for your foreclosure plight.  Maybe you shouldn’t play fast and loose with your finances.

I’m fortunate in that my industry typically performs better during times of economic hardship, and my wife’s industry is a neccessity, so we’re quite stable in our jobs, and I’m grateful for that.  For those who have lost jobs, I feel for you, and hope you’re able to get back on your feet.  For those who bought homes they couldn’t really afford, welcome (back) to apartment living!!

^Z