What if a Slowdown Is a Never-Ending Story?

The New York Times ^ | November 21, 2008 | Ben Stein

[dano1]

I AM endlessly charmed by chatter about when this slowdown/recession will end. (snip)

But this does not look like a typical recession. A typical recession is brought on by Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns. This, at least, is the pattern of the large recessions we have had since the Great Depression, which was a special case, as we shall see.

Smaller recessions have been brought on simply by the inventory-business cycle, but they, too, were amenable to Fed stimulus.

That was because normal credit mechanisms were working.

This time it’s different. Or, because that is a dangerous phrase, let me say that maybe this time it’s different.

The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government’s inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.

The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast.

[goodnesswins]

YEP...what YOU said....and Obama seems to be wanting to make the regulations WORSE...ie enviro crap...taxes...etc

[Travis McGee]

JM Keynes's "great contribution" (sic) was the idea that we could continuously borrow from the future for pump-priming today.

When asked how this would work out in the long run, he famously answered, "In the long run, we're all dead."

Well, that gay old childless queen is dead, but we're here and alive, and we and our children will finally have to pay the price he didn't care to imagine.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

-~~Ludwig Von Mises

[goodnesswins]

Yeah.....speaking of “throwing someone under the bus”....I predict Hillary will be FIRST....and then...she’s outta the Senate....out of the State....and outta politics!!! maybe temporarily or maybe permanently....

[Bernard]

This is just plain stupid. Never ending. Please. Even the depression had an ending. This will be over in two to three years.

The depression ended when we got into WWII, reduced our workforce, and increased demand for the first time in a long time. Roosevelt started out with not much national debt to speak of, and delayed recovery for several years. Obama has a national debt equal to several years worth of spending and no real hope of actually expanding our economy. Two to three years is very optimistic.

[Oatka]

In this situation, where fear rules, we must turn to the federal government for relief.
IMHO, this is what got us into this mess.

We cannot nickel-and-dime our way out of this.
The nasty problem is that we can't dollar our way out either. Years of credit have created a black hole that will devour every bit of "wealth" the govt prints.

Saving the automakers is a step out of the darkness. Or, I might say, allowing them to die is a step toward a terrifying dusk.
I think he's got it backwards. Bailing out Detroit without savage give-backs will ensure that that darkness rivals that of the Biblical "valley of the shadow of . . ."

[Travis McGee]

What followed the last great cloud of (hyper)inflation in Weimar Germany?

[realdifferent1]

As I said, it will not end; see Zimbabwe.

[BipolarBob]

"Everybody has enough cars TV’s Ipods to last the decade . Not much you can do about that ;-)) Build a better car TV or Ipod ??"

No need. Change formats and render the old one obsolete by denying input jacks/fuels for the old technology.

[Jacquerie]

Your ignorance of Keynes knows no bounds.

[Kirkwood]

“Could be. See 24. GMTA.”

With Islam spreading like wildfire, the new dark ages are upon us.

[Texas_shutterbug]

This is not a “cyclical” downturn!

[Theodore R.]

Oprah’s Choice does not have to perform. He can merely declare that he has “solved” the economic woes, and the sheeple will believe him and go on accordingly.

[rbg81]

I agree with your Ben Stein observation. I saw him on Cavuto’s show this morning and I thought there was something seriously wrong with him. Maybe there is, but what a change! He is not the wry, optimistic guy I remember.

[WorkerbeeCitizen]

This could be the “test” that Biden was talking about - the decision the O man makes will appear wrong.

Statist decisions would definitely appear wrong - I agree with you.

[BipolarBob]

Everything is cyclical if you look long term. If you don’t believe me, let’s discuss this again in about 40-50 years and I’m sure you will agree with me.

[Nathan Zachary]

"A typical recession is brought on by Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns."

For starters, the difference is that this is a global recession, not an internal one, and people are in debt up to their ears, not flush with cash or have room to borrow more. It's a train wreck that stretches around the world.

[Future Snake Eater]

What if a Slowdown Is a Never-Ending Story?

"Now don't you worry, Mrs. Simpson. This is the most blatant case of false advertising I've seen since my class-action lawsuit against 'The Neverending Story.'"

[kitkat]

***That means that Obama will have to come down off his campaign rhetoric and do what’s right. Thomas Jefferson did.***

No, he likes the credit bust. The worse it gets, the better for his plans. When it sinks, he can step in with his socialist plans, raise taxes to pay for the government programs, and bingo, we’re a socialist country.

[fightinJAG]

A truly serious stimulus package is very much in order. It has to be big enough and last long enough that Americans do not just sock it away under the mattress. We cannot nickel-and-dime our way out of this. The inflation threat is small in an economy in full credit-collapse mode. There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.

I don't agree with all Ben said in this article (particularly in the case of the Big 3 automakers), but I do agree with his general premise that there is enough fear in the market, worldwide, to lead to a very, very long and deep depression.

One maxim I think is true is that you cannot stimulate confidence. IOW, once a certain level of shock and fear is internalized, almost any amount of direct stimulus the government can accomplish is *felt* as nickle-and-diming.

To have gas prices drop to $1.50, or to get a check for $2,000 from the gubmint, just isn't going to take away the shock of seeing one's 401(k) lose 30, 40 or 50% of its value in a matter of weeks---and knowing darn well that it could take DECADES to get that back, if ever.

Moreover, this maybe-depression is very different from anything in the past because it encompasses very large moral hazards. At every turn of government intervention, there is the problem that the "fix" is rewarding the gamblers and deadbeats and those who played by the rules are getting slapped in the face.

If the "fix" undermines the market morality (e.g., that those who play by the rules generally win) by providing windfalls to those who gambled or punted, there will come a time when good and decent people will have no choice but to conclude that doing the "right thing" is no longer doing the "wise or financially survivable thing."

If that point is reached, we have a fundamental change that will be forever.

All that said, one of the approaches that might work, and might be amenable to schemes that don't reward the deadbeats, is MASSIVE TAX RELIEF for those who play by the rules.

For example, instead of mortgage bailouts to deadbeats, how about doubling or tripling the mortgage interest deduction for those paying their mortgage and living in their home?

How about a credit for credit card interest for those who are current on their bill for the entire tax year? That would reward the people who don't default and encourage spending.

How about loan modification for those who are current---to make monthly payments easier without the lender losing a dime, e.g., reamortization over 40 years?

How about stop giving a hiring preference to those on welfare and let people who were supporting themselves compete fairly for what jobs there are in this economy?

How about increasing the deduction for dependents for people who actually pay income taxes?

These are some examples of ways the government could "spend" money and give it to the people who can, by their good choices, keep this country afloat.

[DTogo]

It'll end when the 55M who "voted against Obama" (not for McCain) march on D.C. and throw all the bums out of their offices and into the street for good.