The prevailing news from the stock market, and from a growing chorus of economists and forecasters, is that the current recession is, for all practical purposes, a thing of the past. A few annoyances, such as high unemployment and massive indebtedness, still remain, but these should take care of themselves as soon as economic growth resumes later this year.
These assertions a worth examining.
The general consensus is that the crisis was caused by an excess of liquidity, provided by the US Federal Reserve. This led to an over-expansion of credit and a bubble in US housing, with the attendant creation of complex mortgage-based securities, which investors and banks eagerly acquired.
When the bubble popped, the securities lost their market value, making many banks holding them technically insolvent. Interbank lending stopped and the financial system went into collapse.
Almost simultaneously, rampant speculation in oil prices, within this same financial system, drove the price of gasoline through the roof. This extended what was at first a financial sector problem into a crisis of the real economy.
Up to then nothing had kept U.S. consumers from spending money they did not have. But gas at four dollars a gallon did. The consumer clamped down, sending the economy into a tail spin. Gross Domestic Product tanked and unemployment shot up. Consumer spending, which is the main driver of the U.S. economy, remains in the pits.
So how come the recession has been declared over?
It is because it is over, at least temporarily, on Wall Street.
The response of the U.S. government to the crisis has been to rescue the financial system from its mistakes with massive injections of taxpayer money, and some smoke and mirrors thrown in.
First the toxic asset problem was dealt with by changing accounting rules. Such assets no longer have to be priced at their market worth, but at whatever their holders declare the value to be. This immediately improved major bank balance sheets.
Second, the Federal Reserve has been providing banks with unlimited amounts of money at a zero interest rate, leading to easy and substantial profits. The Fed also provides a number of additional guarantees, and has promised to keep this up for a long time, so confidence is back and the stock market has rallied.
Recession over!
There is only one hitch. All of the above is strictly financial. There has been no investment whatever, other than a few corporate bail-outs, in the real economy. Jane and Joe are still scrambling to pay their mortgage and other bills while looking for a job.
Wall Street got trillions in tax money. The rest of the country got an extension in unemployment insurance.
In the end, it does not matter who gets the money, as long as it is well spent. But it is doubtful this is the case.
The current policy of excessive liquidity only repeats what was done earlier in this decade to fix the previous recession: drown the financial system in cheap cash. But this time it is done with much greater intensity and on a coordinated global scale.
In all likelihood the end result will be a crisis even more severe than even the present one.
A wholesale change of priorities is urgently needed. Without it the U.S. financial sector is in danger of becoming the modern American equivalent of the 18th century French court at Versailles: an expensive tax-funded playpen for a small, wealthy and influential minority, whose activities are less and less relevant to the country at large.
The Versailles courtiers thought themselves to be indispensable. History showed they were not. In the same vein it is probable that the U.S. financial sector, in its current form, is far less critical to the economy than it is made out to be.
Unless reform is undertaken quickly and on an all-encompassing scale, we might find this to be true in the not too distant future. Let us hope we do not find out the hard way.
These assertions a worth examining.
The general consensus is that the crisis was caused by an excess of liquidity, provided by the US Federal Reserve. This led to an over-expansion of credit and a bubble in US housing, with the attendant creation of complex mortgage-based securities, which investors and banks eagerly acquired.
When the bubble popped, the securities lost their market value, making many banks holding them technically insolvent. Interbank lending stopped and the financial system went into collapse.
Almost simultaneously, rampant speculation in oil prices, within this same financial system, drove the price of gasoline through the roof. This extended what was at first a financial sector problem into a crisis of the real economy.
Up to then nothing had kept U.S. consumers from spending money they did not have. But gas at four dollars a gallon did. The consumer clamped down, sending the economy into a tail spin. Gross Domestic Product tanked and unemployment shot up. Consumer spending, which is the main driver of the U.S. economy, remains in the pits.
So how come the recession has been declared over?
It is because it is over, at least temporarily, on Wall Street.
The response of the U.S. government to the crisis has been to rescue the financial system from its mistakes with massive injections of taxpayer money, and some smoke and mirrors thrown in.
First the toxic asset problem was dealt with by changing accounting rules. Such assets no longer have to be priced at their market worth, but at whatever their holders declare the value to be. This immediately improved major bank balance sheets.
Second, the Federal Reserve has been providing banks with unlimited amounts of money at a zero interest rate, leading to easy and substantial profits. The Fed also provides a number of additional guarantees, and has promised to keep this up for a long time, so confidence is back and the stock market has rallied.
Recession over!
There is only one hitch. All of the above is strictly financial. There has been no investment whatever, other than a few corporate bail-outs, in the real economy. Jane and Joe are still scrambling to pay their mortgage and other bills while looking for a job.
Wall Street got trillions in tax money. The rest of the country got an extension in unemployment insurance.
In the end, it does not matter who gets the money, as long as it is well spent. But it is doubtful this is the case.
The current policy of excessive liquidity only repeats what was done earlier in this decade to fix the previous recession: drown the financial system in cheap cash. But this time it is done with much greater intensity and on a coordinated global scale.
In all likelihood the end result will be a crisis even more severe than even the present one.
A wholesale change of priorities is urgently needed. Without it the U.S. financial sector is in danger of becoming the modern American equivalent of the 18th century French court at Versailles: an expensive tax-funded playpen for a small, wealthy and influential minority, whose activities are less and less relevant to the country at large.
The Versailles courtiers thought themselves to be indispensable. History showed they were not. In the same vein it is probable that the U.S. financial sector, in its current form, is far less critical to the economy than it is made out to be.
Unless reform is undertaken quickly and on an all-encompassing scale, we might find this to be true in the not too distant future. Let us hope we do not find out the hard way.