Nathan Scandella (personal)

The "D" Word is Taboo

So one popular definition of a recession is two consecutive quarters of negative Gross Domestic Product (GDP) growth. The previous quarter qualified, and we've already gotten so much bad news in the start of this (fourth) quarter, that it's guaranteed to be another period of contraction. So, we're in a recession. For the last couple of years, economists and experts have been talking about how "maybe" we're heading into a recession, and whether it would be a gentle, short one, or a longer, deeper recession.

Just like climate change, though, it seems that every time the experts open their mouths, it's to tell us that things are going to be even worse than they told us a few months ago. Oops, we were wrong. But, this time, you can believe what we're telling you. Right.

Here's the problem. There's every reason to think that we're in for a depression, not just a recession. A depression doesn't have to mean The Great Depression, and unemployment at 25%. But, it is bad. A popular definition here would be a 10% decline in GDP. Seeing as how we've already committed to bailouts that are approaching 10% of our current GDP, I think it's very reasonable to start talking about a depression.

But, you won't hear most economists talking publicly about that. Why not? Haven't they been underestimating this problem for the last couple of years? Yep. Unfortunately, economists fall into either one of two camps: 1) they're stupid, or 2) they understand that our economy is built on confidence. So, if a bunch of economists start talking about a depression, people will get scared, cut way back on consumer spending, and the prophecy becomes self-fulfilling. All of this means that economists really can't give us decent warning of economic hard times. They always have to be behind the (downward) curve, as they have been recently.

This issue is also behind why we were presented with a gigantic $700B bailout plan, and told that it needed to be ratified immediately, before any time could be taken to properly work out the details. Paulson and Bernanke no doubt had been considering such a plan in advance of notifying Congress. However, they surely knew that if they released information about the plan before it was absolutely certain that we needed it, then the public response would have ensured that it was in fact needed. Therefore, they dropped this monstrous rescue package on us at the last possible minute, predicting financial armageddon if we didn't go along with it. In retrospect, we see how poorly crafted the plan was. We left the plan without sufficient measures to ensure that it would actually stimulate lending, and it turns out that the plan allowed Paulson to use the money for a completely different purpose than originally advertised (buying mortgage-backed securities). So, not only does this bogus system prevent "experts" from properly warning us of problems, but it leaves us without the tools necessary to craft sound solutions when the problems do arise.

What if climate scientists couldn't tell us that global warming was occurring? If they saw the evidence that it was happening, but knew they couldn't warn us? Pretty scary. Well, welcome to our economy. It's a classic con: a confidence scheme. It doesn't work unless we think it's going to work. So, don't pay too much attention to all the graphs and numbers the economists throw up. They're not doing science. It's closer to religion, and it's all based on your faith.

Sleep tight.

Posted at 11:01PM Nov 17, 2008 by Nathan in Economics  |  Comments[0]