I am no economist. I am completely confused by the onslaught of statistics, explanations, stimulus packages, and public speculation on what caused it and what we can do about it.
It seems to me that, if economic stimulus will help keep the economy healthy and restore us back to normality, then the answer was to not tell anyone that money was tight so they’d continue spending as before. Instead people are being more cautious with their money, for fear of losing their jobs or that the Banks will collapse and take their money with them.
Could it be that if nobody said anything in the first place, it would’ve just been a subtle bump on the economic road, instead of the crater it has been painted as?
Well you can’t really keep something so massive a secret. When the Dow Jones tanked from over $14k to below $7k in the span of 1.5 years… how do you propose “not telling anyone” about that?
I don’t know a whole lot about economics, but beyond the basic microeconomics stuff that’s logical and makes sense, a lot of it seems like a complex, ambiguous system that we essentially control by collectively believing that it’s good or bad or that something with little value is worth a lot. I mean - are we less productive today than we were 2 years ago in any real sense? Did we lose natural resources, factories, or skilled workers? It’s not as though there was a drought or something with a substantial effect broke out - we essentially decided what we thought things were worth wasn’t true and the whole thing just collapsed from there. It seems like we can restore the economy by collectively deciding it’s better again and engaging in normal productivity behavior.
I remember an onion headline that said “Dow Jones plummets on news of Dow Jones plummeting” and it seemed to have a certain truth to it.
I think the OP is asking, what if nobody had said anything in the first place at the 14k level…
Which I don’t think has an answer, because once something is known, it’s known. And people will react. I do think it was a good idea to question housing prices. I’m not saying I wanted the market to tank, but housing was ridiculously high in most places. Insanely high. Unsustainably high. Yes I made up that word.
And then somebody asked, “what is this stuff really worth?”, then everything went to hell because we all know those houses were not worth what was paid for them.
What your asking about is called the paradox of thrift. In normal times thrift is a good thing, but during bad times thrift can make things worse. This effect can exacerbate recessions but does not cause them. If economics were just a self fulfilling prophecy recessions would never end. Because of the lag time of macroeconomic measures, they end months before most people realize it and while the press is still reporting bad news.
They also start months before people realize it. But the knowledge of “good times” or “bad times” has a feeding effect on whatever the current news is - until the “good” or “bad” is unsupportable. And while “thrift” is good in normal times - it also becomes unpopular in good times - the belief that there is always more money convinces people to spend more.
We seem to be closing in on “unsupportable” for this recession. Eventually, we find a spot in production that we can’t go below - and people start getting tired of being scared to spend, and then “natural” growth starts to occur again.
I’m reading “House of Cards” about the fall of Bear Sterns. At the root, Bear had a rotten core, but they could have kept trading and stayed in business if the perception of them having a rotten core wouldn’t have come about. However, that would have only let them build their house of cards higher - eventually their daily funding was going to fall through because their collateral was bad - and the perception was going to get loose - because everyone else had similar bad collateral - they all knew what was on that balance sheet.
But there are always foreclosures, during good times too. I figure once people say that the number of foreclosures means a downturn, then further foreclosures come as a response to that, instead of happening on their own.
I am probably wrong, but economics is such a bizarre science, it seems like it’s all made up anyway. I’m not into conspiracy theories, but if it turned out all this was continually orchestrated by a single individual, it wouldn’t surprise me.
<tinfoil hat=on>
The economic chaos began too early. It was supposed to begin after the inauguration but Cheney screwed up the timing. So instead of Obama taking the full blame for the Republican/conservative/radical right rape of the economic system, Bush and the Republicans got nailed for it as well. That’s why the Republicans are playing their games to hide their complicity. The corporate media continues to play up Obama while downgrading the real sources for this mess.
On the other hand, Bush/Cheney were quite successful in delivering massive profits to their oil buddies during the final months of their term.
</tinfoil hat>
I subscribe to what I call the Elmer Fudd Principle of Economic Panics: You can run off the cliff but you’re okay until you look down. The underlying factors that produce the economic panic can all be in place for a prolonged period before anyone notices their importance. So once something triggers the panic, people will look back and see the underlying causes were there all along but somehow didn’t matter.
It would help if you, you know, actually knew a bit about economics, but not required.
Yes, to a certain extent all the media coverage and whatnot feeds into the perception of a bad economy, just like it does during a speculative bubble.
OTOH, lenders created an unsustainable situation by lending massive mortgages to people who never had any hope of ever affording them. Eventually that unsustainable situation can no longer be sustained. So there is a very real element to the situation where people are unable to pay their mortgages and lose their homes.
It doesn’t matter if you tell people money is tight. It’s the banks who lend (or in this case aren’t lending) money so people can buy homes or expand their businesses. If the banks aren’t lending money because they were burned by all those bad loans, no homes get bought and no businesses expand.
So the stimulous package is really to encourage banks to start lending more money and encourage economic growth.
I totally believe that was the cause, I could see its inevitability myself, though nobody seemed to care that I knew.
But over here in Australia we are not suffering this specific situation.
We are having companies close down or cut jobs, but the cause of the downturn seems to be some amorphous international economic osmosis, where because the rest of the world is suffering losses and slowdowns, we’re stuck in it too. Meanwhile, and this is my point, homeloans here seem to be cruising along just fine, and house prices are staying steady or going up.
So the cause, for us, is “just because it is” which is a wholly unsatisfying problem that we’re trapped inside, and seemingly impossible to fix.
It seems to me that we were floating on a falsely inflated economy, and now we’re back only in a comparative downturn, in that it only seems bad because it isn’t as good as it was when we believed the lies the banks were spinning us.
That’s part of it. The economy works in cycles. Things are never as good or as bad as everyone thinks they are. When things are good, everyone spends money thinking the good times will last for ever. When things are bad, everyone waits and sees for the Apocalypse. Inreality there is a bottom. There is just a certain amount of economic activity that has to happen. People buy groceries. They buy gas for their cars. Once things level off for awhile, people get more comfortible that the world isn’t going to end and they start spending money again.
You can’t “just not tell people” though. The overall economic mood is driven by the information provided by millions of people based on their observations and experiences with prices, observations at work, and their ability to make ends meet.
There are several ways to overleverage an economy. Even if a country hasn’t had a real estate boom and bust cycle if they are major trading partners with economies that have, that can cause a recession. The downside of globalization is that countries can suffer from stupidity in other countries and have little recourse. Since economics involves people crowd psychology is an inevitable part of any economic occurence. Yet it is almost never the whole story, business cycles are real and they do have consequences.