Recession Watch 2008: Is the Sky Falling or Not?

posted by Curt Bentley, on April 3, 2008 07:35 pm

It's been hard to miss the gloating over the economy--both by those who are convinced that we are about to enter into a major, major recession and those who criticize the doom and gloomers. My prior posts leave little doubt that I find myself more aligned with the former group. Both sides seems convinced that recent events have shown that they've been right all along. The doom and gloom crowd can point to Bear Stearns and bad economic data and the more optimistic group can point to . . . Bear Stearns and somewhat better economic data. So, is the sky falling or isn't it, and what will it take for this thing to be finally resolved?

Nobody doubts that we're going/have gone through a rough time. It appears that the doom and gloomers were right about that. If you take government officials seriously, apparently the entire financial system came close to collapse (whatever that means) with the run on Bear Stearns. However, the more optimistic group views that same news with optimism. The entire point, to them, is that there has bee no financial Armageddon; the government institutions set up to prevent that reality stepped in and did their job. While it's not going away, the liquidity crunch fears that were so palpable in the immediate aftermath of Bear Stearns seem somewhat diminished. So, are we out of the woods or not? That's what millions of Americans, including yours truly, want to know.

Let me weigh in with my two cents. One of the hard things here is that it is impossible, in my view, to know what's really going on. People thought we were coming out of the woods right before Bear Stearns collapsed. One of the problems here is a tremendous lack of reliable information. I suppose that's inevitable when so much of the functioning of the financial system depends on the maintenance of confidence. Now, it seems, many realize that the confidence we had might have not been well-placed. At one level, the credit crisis is a confidence crisis. Nobody knows the exact financial condition of the banks that drove the easy credit economy of the last five years--perhaps not even the banks themselves. That's a scary thought--and people are starting to confront it. Could there be another Bear Stearns around the corner? Perhaps, perhaps not. Whoever it might be certainly won't tell us about it beforehand. And, if there is, how many more can the Federal Reserve engineer a rescue for? These are big, unanswered questions . . . and it appears that nobody can answer them right now (or at least no one reliable is stepping up and claiming that they can, and that, should tell you something).

The second huge unanswered question out there is what the Fed's actions mean for our future. Article after article talks about the taxpayers being "on the hook" for Bear Stearns now. What exactly does that mean for the next couple years and what does it mean for our future? What does it mean for us if the Fed steps in to act in a second, third, or fourth Bear Stearns situation? The whole thing strikes me as a rather ominous precedent that (even though it is getting some significant media attention) is not really getting the attention that is deserves. In the collective sigh of relief that went up upon the saving of Bear Stearns, we may be evaluating the action a little bit uncritically. We're told it was necessary to save the Wall Street fat cats in order to protect John Doe middle class. The "we had to save the bad guy to protect the good guys" rationale is unconvincing at the best of times, yet it seems like it is being embraced a little too readily in this case.

So, is the sky going to fall? I'm not entirely sure any more. At one time I was completely convinced that it was. So, I've moderated my views a bit at this point (and give Bernanke a little more credit for intelligence than I did before, although I still disagree with him on principle). But, despite my uncertainty about the short-term economic result, I am completely convinced that the landscape that we operate in is going to be significantly changed by our love affair with houses, big trucks, boats, and credit cards. It strikes me that, during the last few years, we made many promises that we're still going to have to keep and that there's a long way to go before we can sleep knowing exactly what type of bed it is that we've made for ourselves. Hang on for the ride, and, for once, America, live on the cautious side. We should all at least be able to agree on that.

Add New Comment

Your Name:
Your Comment:

Security Code: