A Counterpoint, From Jeremiah

Actually it was Bill Otis who wrote this in response to the recession charts I posted last night, but he sounds a bit like Jeremiah. Which isn’t to say that I disagree with him:

The current recession has a number of features that seem to me to make it considerably more worrisome than those in the past. As your second chart shows, it is, albeit by only a slight margin, the most significant contraction in GDP in over 50 years. But that is only the beginning. The Dow has lost 53% of its value in just 18 months, wiping out trillions in wealth — indeed, wiping out every bit of investors’ gains for over the last 12 years. This is at precisely the time when those investors — probably mostly people in their fifties, although I have no way of proving that — are trying to figure out how to fund their retirement. The drastic reduction of the value of their holdings, and the consequent scaling back or elimination of stock dividends, has made it increasingly likely that these people will be thrown on the mercy of the government. But one way or another, the recession’s effect on stocks and stock dividends (and to a lesser though significant extent on the value of housing) has beaten down personal wealth to an extent unknown in my lifetime.

Yet more worrisome is the qualitative effect of the recession. Lehman Brothers collapsed months ago. Wachovia followed suit. Citi and Bank of America are on life support. GE, GM and Alcoa — all industry giants — are in imminent danger of bankruptcy. There is a realistic question whether the financial system as we have known it will survive at all. That was not the case in other post-War recessions. It was only the case during the Great Depression.

Our ability to recover is also open to question in ways different and more troubling than in the post-War past. Post-War America had a degree of toughness that has since been lost at the mall and in the spa. It knew privation and could live with it. As a relative matter, it believed in saving rather than borrowing. It believed in producing rather than consuming. It was not a nation of the “You deserve a break today,” victim-centered, bail-me-out culture that dominates now. In other words, it was a nation far better prepared to tolerate the painful steps necessary to long term recovery, as opposed to the next (and the next and the next) stimulus check paid for with money we don’t have and will never have, all to produce a fleeting and mostly illusory stop to the pain.

Finally, our ability to bail our way out of this recession is extremely limited, because, even if they worked and could be paid for, bailouts, and government spending generally, fail to address the fundamental problem at the heart of our difficulties. The fundamental problem is not liquidity or even solvency. It is trust — or more correctly, the lack of trust — that has spawned the breakdown in the credit markets. The lack of trust cannot be remedied with money. It can only remedied with that which creates trust, to wit, honesty. But honesty is an obsolete and orphaned virtue in today’s landscape.

The evidence of this is so varied and widespread that it’s hard to state it in an organized or lucid way. The current President of the United States lies almost every day about one thing and the next (earmarks, transparency, accountability, etc.). For this he is hailed as a great orator. The government routinely presents budgets and budget forecasts that are dishonest to the point of comedy. Corporate leaders routinely lie to their stockholders. Ten years ago, the President of the United States indignantly lied about an illicit affair; the reaction was (1) his approval rating went up, and (2) we were told, five minutes after the truth was extracted from him, that it was time to “move on,” which admonition we largely and casually obeyed. The sub-prime loans that underlie the current near-collapse of the financial system were openly known on Wall Street as “liar loans.” This did not stop brokers and appraisers from building on the deceit by lying about what those loans were worth, and concealing their dishonesty by bundling the loans in exotic packages so complex that no one could detect the lying. And on and on.

A healthy economy cannot be built on a sick culture. More specifically, transactions that depend on trust — meaning most of them — cannot exist where the basis for trusting is as thoroughly eroded as it is now.

This is not the same country that fought its way through recessions of the past. We have tossed aside, as excessively rigid and insufficiently compassionate, the discipline that saw us through them. There will be a price to be paid for this, and we have only just begun to pay it.

I agree with much of what Bill says, although I’m not especially alarmed (except as a shareholder) by the possible collapse of some of our corporate icons. In every era, the seemingly impregnable corporate giants of the day are on their way to oblivion.

I do think it is easy to forget what a disaster the recession/stagflation of the late 70s and early 80s was. That era was, among other things, bedeviled by inflation, an evil which we have been spared in the current crisis, although the Obama administration has pretty much guaranteed that it will return some time in the next couple of years. That period, unlike this one, was also marked by a sense of relative decline in the United States. Actually, it wasn’t just a sense, it was a reality; we were losing the Cold War. Many argued that the U.S. needed to adopt a more statist economic system like our supposedly more successful rivals in Japan and Germany. No one makes that argument anymore, but (somewhat ironically) we’re doing it anyway.

But the destruction of trillions of dollars in wealth that we have witnessed over the last six months is unique in modern history. It isn’t just the bursting of a bubble like the dot com collapse of 2000. It is a sort of neutron bomb effect, in which the physical means of production–buildings, fields, factories–are still standing, but the living heart of the economy, confidence in the future, has been wounded if not killed. I don’t think that confidence (or, as Bill says, trust) will return any time soon.


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