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Anatomy Of A Recession

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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.

Finally the election was over and everyone breathed a sigh of relief, expecting to be relieved of the tired tirade of fear. But it didn’t stop. The mantra of fear continued, causing belts to tighten even further with the usual domino effect of lost jobs and less investment by business. Fear became the driving force behind hurried legislation that should have been the subject of serious debate, but wasn’t.

And now the drumbeat comes from the opposition. Critics are loud and clear regarding attempts to stimulate the economy by the current administration. Again, fear of failure is being invoked to discredit current efforts. I guess you could justify the criticism on the basis that today’s critics are doing exactly what the opposition did to the previous administration. But in the meantime, the nation suffers, another reason why debate should occur before legislation passes rather than after it is passed.

It is worth noting that we went into a recession in March of the last year of the Clinton administration and it was thus inherited by the Bush people. I do not recall a single instance of the Bush administration trashing his predecessor to gain public support. Instead, tax cuts were implemented, spending increased, businesses invested and despite 9/11 the recession ended and economic growth resumed. The missing factor was the psychology of fear. There was no campaign rhetoric to scare people into destructive behavior.

Lately I have wondered what might have happened if the politicians and the media had just “shut up” and let the market sort things out. However, I am not one who believes that government should stand idly by and not intrude when economies get out of hand. There is an important role for the government, but it should be driven by tried and proven tactics rather than political excesses based upon fear and uncertainty.

Like the aforementioned government programs, our business also works to stabilize an economy. We provide funds at times of direst need, and often when no other help is available. Today our business stands tall among financial services, a fact that is a credit to our leaders and regulators. With one notable exception, our CEOs have not been subject to the unflattering labels others are enduring.

One final thought gleaned from years of observation–those who rise to the top by demeaning others and making false claims, usually do not remain at the top very long.


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