The day that Lehman Brothers collapsed I was in Washington. I sat in front of the TV in a restaurant and said to myself: ‘What I predicted for years is actually happening.’
Over the last year I had many discussions about the reasons for the recession. I am not talking about the financial crisis, because the reasons for that are pretty well known and I have discussed them here too. Surprisingly, a lot of capitalists are suddenly Keynesian converts and are yelling for the government to step in and do ‘something’. Apart from propping up failing banks, the government is called upon to undo the real estate bubble they caused in the first place. Hmm, I always thought that you can’t solve a problem with the means that created it?
There are those who claim that the recession is caused by a lack of consumer confidence and the related ‘Paradox of Thrift’ as described (but not first) by John Maynard Keynes in his General Theory in 1936. Keynes proposed that the excessive saving by consumers in a recession does not lead to increased savings that will make money available for investments, but that the related downturn in the economy actually reduces the amount of savings overall. Therefore the hoarding of cash has to be made unattractive by higher taxation for the wealthy to enable increased government (even deficit causing) spending to revive the economy. While that might sound logical it assumes a kind of market equilibrium and does not really take the time-delayed world market situation into account that did not exist in 1936.
There are numerous other relationships in the economy as a complex adaptive system. The media were playing their part by motivating consumers to act differently. This time around, the banks are in no position to offer more loans and the savings would just prop up their capital rate. Given the lack of confidence in banks and stocks, consumers are buying gold and real estate and thus their savings will not increase bank lending. What about falling prices or deflation in a recession that might stimulate demand anyway, regardless of savings? Why does anyone see a correction of inflated prices as such a problem?
I see large enterprises much more responsible because they reduced cost in expectation of a downturn and thus created the recession from the financial instability. In the US alone large publicly traded businesses have laid off more than 600.000 well paid employees since last year and are therefore more profitable than before the recession. Consumer confidence and cash is however so low that they can’t afford or don’t trust the stocks and thus they remain low despite that. So am I back to bashing the large greedy enterprises out of principle? No, I never have but I am just pointing out the incompetence of CEOs and the shortsightedness of shareholder value – as did last weeks ‘The Economist’ by the way. It said clearly that for example Bank of America with $23 TRILLION in assets is an unmanageable black box.
So as long as we have those unmanageable behemoths it is up to the government to save us from management incompetence? The problem is that whatever governments do is too late and, given the lack of working causal models, mostly wrong. Most economic theories are based on outdated, non-global economic models. Yes, ultimately the planet is a closed economy too but the national market situations and politics are still different enough and have different time lags and linkage parameters to be predictable.
So should governments not do anything? Absolutely not! That would be the worst of all situations, because not only consumers but also businesses would take a wait-and-see attitude. But if government monetary actions are maxed out (i.e. a near 0% base rate) or further taxation could have dire political consequences, what is it that a government could do beyond accepting the drawbacks of deficit spending?
It is really not that hard! Governments can CHANGE REGULATION! That is cheap and effective. So am I asking for more regulation? No, actually I ask for LESS. Simplify regulation for consumers and SMBs but regulate large businesses to the point that there won’t be an incentive to grow beyond a sensible size. Smaller businesses are nimble and would recreate the free market economy we have lost. Smaller businesses focus more on quality and service and employ more people to that effect. They are also local and outsource much less to Asia. That is more than a taxation or cash-for-clunkers program could stimulate the economy, mostly by creating new businesses, new jobs and thus consumer confidence.
Why in the world is that so hard to understand and accept?