Anatomy Of A Recession

There is a pretty strong consensus today that our current economic woes were brought on by the bubble in housing. There is less agreement, though, on the exact cause of the bubble. Some allege that it was caused by greedy or careless bankers chasing profits, while others believe the real problem was politicians pressuring banks to make subprime loans. Since I don’t know the answer, I will leave it to historians to sort out.

But there is another culprit that has played an important role in this saga. It continues to this day and it is obvious to all who will stop and think. I refer to the psychological factor. The twin engines that drive any economy are consumer spending and business investment, both of which are heavily influenced by psychological factors such as fear and uncertainty. Politicians of all stripes as well as the media are skilled at using such factors in pursuit of an agenda. Perhaps a look at the record will illustrate.

About two years ago it became apparent the economy was starting to slow down after 6 years of solid growth. The media labeled it a recession in being long before it actually was. In order to turn things around the administration and Congress approved a stimulus package consisting of cash payments, typically $600 to singles and $1200 to couples. The objective was to encourage spending, which in turn would produce investment by business. It could have worked, but other factors intervened.

At about the same time, the presidential election cycle started to heat up in earnest. Leading candidates raised the specter of fear, telling people we were facing a crisis akin to the Great Depression of the 1930s. The result–people did not spend the money and business did not invest. Fear triumphed and the money went under the mattress, stimulating nothing.

As one who lived through the Great Depression, I resented the comparison with today’s economy. It was simply not true; in 1933 there was no Social Security, Medicare, Medicaid, unemployment insurance or health insurance, so-called automatic stabilizers. Additionally, there have been more recent periods when unemployment exceeded 10% and interest rates were over 20% and we recovered very quickly. As bad as things were and are, there was no justification for the extreme fear-mongering that prevailed in 2007 and 2008. It was all about getting elected, and it worked.

One other difference in the 1930s and today regarding psychological factors was that fear itself was the enemy as exemplified by President Roosevelt’s treatment of the subject. I recall many memories of the family gathered around the radio on Sunday evening listening to FDR’s fireside chats and his offering hope to a world in distress. Some today say his spending programs did not work well–and that may or may not be true–but his message of hope eased the minds of us all and helped to dispel the notion of fear. Quite a contrast to those who on one hand scare the pants off of everyone and then in the next breath paint themselves as the only hope. Politics at its worst.