why are we in a recession, page-69

Something for the pot.


From the Daily Reckoning, 6 Feb.


--Recessions are perfectly natural in the business cycle. Human beings take risks with borrowed money during a growth phase. Some risks pay off. Some don't. A recession is a reckoning up of the risks. The bad investments are liquidated, asset values readjust, and the next cycle begins.

--You can only get a depression when the government and the monetary authorities take unusual steps-driven by political motives-to prevent the natural process of recession. This is why today's policy moves are setting us up for a Depression. And it's not the first time.

--It's widely believed that the Great Depression had its origins in the slow response of the Fed to the banking collapse that followed the stock market crash. That failure, so the theory goes, was followed by too little fiscal innovation and government spending by then U.S. President Herbert Hoover.

--But all of that claptrap is exactly wrong, we humbly suggest. The Depression was a foregone conclusion the minute the business cycle was hijacked by manipulation of the credit cycle. A recession is natural. A Depression is always man-made.

--That's right; the origin of the Depression is in the credit boom that preceded it. The credit boom of the 1920s made it inevitable that the natural rhythm of the business cycle would be amplified and made more severe. The boom was boomier. The bust was...worse than it had to be.

--It was made worse by government policies that put America into debt, allocated capital in the most inefficient hands possible while crowding out business investment, and locked in wages and prices higher than they ought to have been, further delaying the vigorous rebound in employment and wages you usually get in a recovery.

--To repeat, recessions are a natural and unavoidable part of the business cycle. Depressions are the bill you pay for trying to avoid recessions with even looser monetary policy and more government spending to stimulate consumption. What you need is a cleansing break. What you get is a money-induced fever of pointless economic activity, full of noisy cash registers, signifying nothing.

--So here we are on a Friday, waiting for the Depression. How seen we get one depends, in some small part, on what Timothy Geithner comes up with next week and world stock markets receive it. Geithner unveils his plan to rescue America's banks and get the credit crisis behind us on Monday. It had better be a good plan.

--What can you expect? Well, for one, we'd be really surprised if there wasn't a suspension-at least for a period-of mark-to-market accounting. This would prevent the banks from having to realise losses on securities they don't intend to sell, but are currently held on the books at values well below market value.

--Another element will be buying "toxic" assets from the bank. At what price? You'll find out soon enough. It probably won't be fair value. But it won't be so far below fair value that it forces the banks to realise huge losses and require even larger infusions of taxpayer capital.

--Not to be a stick in the mud, but do you get the feeling that the Feds are already one or two steps behind in the game of "prop up the falling asset values"? Bloomberg reports that, "Moody's Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments."


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