Sunday, September 26, 2010

We ARE smart people! Yes! Yes! We ARE!!

Then why are our best minds failing us?   Why is the economy in the toilet and there is not good sign of recovery anytime soon?

I just think our economists have it wrong.  This is from a guy who may become an economist one day.  My thought is that our recession is not in a normal business cycle recession which says that manufacturers build up inventories until demand fails off, at which point manufacturing pulls back until inventories fall back to normal levels and consumption increases.   Keynesian expansion was made for this type of downturn. 

This is an accountant’s view of the problem.  This is a balance sheet recession.  There was not an over supply of inventories in September 2009.  Instead we devalued our assets over night, and we had a leverage problem.  When banks have fewer assets on their balance sheets to leverage against our loans, they have less to loan, and business contracts.  When we have less equity in our houses and our neighbors are moving out of theirs, we become more conservative, pay off our own individual debt, and restrict our buying.  So, if the Government stimulates the economy, we won’t respond as normal.  The Federal Reserve can flood the banks with cash and the cash will just sit there, especially after the banks raises the criteria for borrowing.  

The entire balance sheet of the country has been devalued, when our country borrows for the stimulus, we accelerate sovereign debt problems. 

What this adds up to is that there are no easy fixes to the recession.  Knee jerk reactions won’t work.  We may be in this thing for a long period of time.

Michael Hirsh says that our best minds are no longer becoming economists.  They are AWOL and have become financial engineers.   Ugh!

1 comment:

  1. This is really a response to several of your posts. I find them very interesting and I’m glad they are out there for me to consume.

    Are we really smart? I’m beginning to question this. We are becoming a nation of people that know nothing, yet have the ability to answer to anything. The answers are at our finger tips and with this great tool we’ve become less self-reliant, less able to make decisions, and prone to take what we read on our first Google hit as the gospel. We don’t take the time to study anything; instead we take our information in two minutes blurbs with no consideration of context. While technology is a great tool I surmise it is making our youth lazier, not smarter.

    I agree with you, the economic indicators show that this recession was caused by “balance sheet problems” and some argue that these problems have led to an economy collectively tightening its belt. I wonder though, have those that were not worried about their balance sheet learned? Or, are they temporarily being held down by lenders, which is in affect swaying all of the purchasing power to those that have been historically fiscally conservative?