Are Recessions A Good Thing?

Today’s post is a follow-up to yesterday’s, Recession on the horizon?. Saving Diva asks if a recession is necessary for the economy? And Lazy Man isn’t entirely convinced we’ll see a recession.

I think a recession is a normal part of the business cycle. Messing with the business cycle in 2001 is what caused the huge housing bubble. When I say messing with the business cycle, I mean manipulating the interest rates to keep them artifically low and pumping the economy full of excess and easy liquidity (which is another way of saying cheap and easy-to-qualify-for loans).

Asset prices shot through the roof (i.e. houses, investments and businesses became insanely expensive to buy) and lending criteria dropped to historical record-breaking lows. (Did you hear about dogs getting credit cards?)

Americans stopped saving money because there wasn’t any incentive to (with savings accounts yielding under 2%) and kept refinancing their homes to pay for new cars, vacations and home improvements.

If you’ve been reading the news, this has already come to an end.

Lax lending standards have caused a flight to safety and a global liquidity crunch. A few hedge funds that speculated in mortgage-backed securities went under which sparked a slew of redemptions causing most hedge funds to sell off major holding and triggered a stock market meltdown.

With over 50 lenders going out of business this year, there have been a lot of layoffs, however the Federal Reserve has largely ignored these numbers. Today’s unemployment numbers which were pretty dismal came as a shock to wall street (which leads me to think people actually believe the lies coming out of the Fed). The Bureau for Labor Statistics quietly revised July job growth number down to 68,000 from 95,000. That’s a HUGE revision, don’t you think?

Countrywide also announced 12,000 layoffs or 20% of their workforce. How exactly are they going to ‘gain marketshare’ when their market is atleast 25% smaller is beyond me.

Almost a year ago today, I posted an article from Businessweek, saying that “Shilling expects house prices to drop by at least 20%, which will cause a major recession”.
There have been record foreclosures in the past few months, “driven by two factors heavy job losses in the Midwest states of Ohio, Michigan and Indiana and the collapse of previously booming housing markets in California, Florida, Nevada and Arizona.

The Midwest has been hit hard by a heavy loss of jobs in manufacturing, especially in autos and related industries”.

Auto sales and retail sales are down sharply too.

The only positive aspect right now is that oil at the pump is pretty cheap. But this is an anomaly, since the cost of oil per barrel is near all times highs. Milk, and other basic food items have definitely become more expensive where I live (even the items at Carl’s Jr, my favorite fast-food place).


I think we’re already in a recession. It just won’t be reported for another 6-8 months.

And now we consider if recession is a good thing? Frankly I don’t know, but here’s what an editor of a newsletter I subscribe to had to say.

When house prices come down, it sets off a whole chain reaction of
explosions – in the financial industry…the homebuilding
industry…the retail industry…and ultimately, even the
manufacturing sector! The result is recession…lower consumer
spending…lower asset prices…less speculation…more fear/less
greed.

Is that a bad thing?

“Sometimes it sounds as though you WANT stocks to crash…it sounds as
though you’d be happy if a recession were to hit,” writes a concerned
Dear Reader. “Isn’t that a little mean spirited?”

Yes, we would like to see a real crash on Wall Street. And yes, we
would like to see a real recession. Is that mean spirited? Not at all.
Au contraire, it comes from the deepest, most public-minded, most
generous impulses of our entire idealistic nature.

This boom is a fraud, we keep saying. The sooner it ends, the better.
It is a fraud because it is not based – at least not in America – on
greater output, capital formation or wealth creation. Instead, it is a
wealth destroying boom…one that rests on consumption, speculation
and debt. Speculators and Wall Street itself get rich. But most people
merely go deeper in debt…and become poorer.

What’s worse, the longer this humbug boom goes on, the more popular
attitudes and habits are shaped by it. “Prices always go up,” say the
lumpen, “so buy now.” “You can’t go wrong in stocks and real estate,”
say the turnips. “A nice young man just offered to refinance our
house,” say the homeowners. “Don’t worry…Ben Bernanke is not going
to let us lose money,” say the speculators. “Deficits don’t matter,”
says the Vice President.

Corrections, like revolutions, confessions and forest fires, are
unpleasant. But they are often necessary. They clear away the dead
wood.

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