Will we Learn from this Recession that There are No New Paradigms?
Twenty years or so ago, when my I was planning a move to California for a new job position, I listened to an interview regarding a study of the psychological affects of recessions on individuals and communities. Specifically, the study compared the incidence of mental illness, depression and suicide in Los Angeles during the recession there in the early 1980s with New Hampshire during the 1970s.
Apparently, mental illness, depression and suicide were more prevalent in southern California at the time than had been the case in New Hampshire during the previous decade. The study attributed much of the different experiences of the affected communities to differences in family and community structure. In New Hampshire, people continued to live in extended families and extended communities. During the economic downturn, older members of the community would tell stories about earlier recessions, and pass on the wisdom of the elders:
Economic cycles are part of life, like the seasons. Families need to cut back and save as the downturn approaches. During the downturn, workers need to be patient and improve their job skills. And, like the seasons, this is normal, and like a hard winter, this too will pass.
Los Angeles was a very different place, where people had moved to the new world of optimism and opportunity. But in the face of an economic downturn, the perspective of life and the economic seasons was lost. Instead, lacking the wisdom of the grandparents and elders in the community, the fear and pessimism that comes with job losses and economic decline was exacerbated and reinforced.
Over the past months, our country has responded to the recession with fear and pessimism that has been largely unchecked by an historical perspective on economic cycles. We have responded as Los Angeles responded, and the politicians and the pundits are exacerbating the fears expressed in conversations around kitchen tables, in beauty salons and at Starbucks.
Looking back, it is apparent that the depth and severity of our current economic downturn is due in large measure to the success of the Federal Reserve in forestalling significant periods of economic downturn for much of the past twenty-five years. We forgot--as individuals, as families and as businesses--that the economy is cyclical.
But even worse, we lost the value of periodic recessions as a cleansing and humbling time. For individuals and families, recessions are a time to take stock, to cut back on our materialist tendencies, to save, to pay down debts, to retool our skills. For businesses, recessions are a time to rethink strategy, to close marginal operations, and improve attention to costs and excess. For bankers, it is time to learn to write off bad debts and tighten up lending standards, and perhaps teach young associates the basic principle that when there are no profits, there are no bonuses.
In 1997, Foreign Affairs magazine published "The End of the Business Cycle," trumpeting the success of the west in conquering the business cycle.
"Business cycles -- expansions and contractions across most sectors of an economy -- have come to be taken as a fact of life. But modern economies operate differently than nineteenth-century and early twentieth-century industrial economies. Changes in technology, ideology, employment, and finance, along with the globalization of production and consumption, have reduced the volatility of economic activity in the industrialized world. For both empirical and theoretical reasons, in advanced industrial economies the waves of the business cycle may be becoming more like ripples."
Lost in the triumphalism of the article was recognition of the important role that periodic economic downturns play in stemming the exuberance, the hubris and the bad habits that build up during the expansionary phase of the economic cycle. For the past twenty-five years, the Federal Reserve has managed to forestall the regular economic downturns that previously characterized the post-war years. The dramatic increases in labor productivity that came about through computerization and changes in information technology, and the suppression of wage inflation that resulted from globalization and outsourcing, combined to suppress inflationary pressures.
As a result, the economy ploughed forward through crisis after crisis, through failure and fraud. The collapse of Continental Illinois. The savings and loan crisis. The bankruptcy of Drexel Burnham. The Asian financial crisis. The Russian financial crisis. The Internet bubble. The collapse of Long-Term Capital Management. September 11th. Enron. WorldCom. At each point of crisis or threat to the financial markets and investor confidence, the Fed was able to forestall downturns and spur continued economic growth by flooding liquidity into the system or pushing down interest rates, with little concern to the normal inflationary consequence.
Ten years later, in 2007, Business Week Chief Economist Michael Mandel articulated the new economic paradigm on his Economics Unbound blog.
"We now may be in a world of mini-recessions--sharp falls in one or two sectors which do not pull down the whole economy... A sharp drop in one sector--say, housing--may pull down a couple of adjacent sectors, such as furniture. But the rest of the economy steams on, and maybe even accelerates, as resources are transferred from the weak sectors to the strong sectors.
"This picture of the world actually fits very well with neoclassical economics. We may get a couple of quarters of negative GDP growth, but deep economy-wide recessions may be an anomaly rather than the norm."
Now, we have learned that there is no new paradigm, and the business cycle is still with us. But this time, without periodic downturns to temper our exuberance and stem our excesses, we are paying a heavy price.
Consider this. Since Paul Volker stepped down as the Chairman of the Federal Reserve twenty years ago, median family income has increased ten percent in real terms. During that same period, household mortgage debt increased almost six-fold and consumer credit more than tripled, and financial institution debt grew more than eight-fold. Together, household and financial institution debt increased by over $24 trillion.
Even now, over a year into this financial crisis, we have yet to fully accept the depth of pain and dislocation that deleveraging may require. As we face the consequences of the boom years, we are going to need old wisdom as much as we need new policies. We are going to need to remain calm in the face of 24-hour cable shows playing on our fears and trumpeting every moment of our economic travails. Last night, President Obama tried to move beyond the position of policy wonk-in-chief, toward the role of the grandfather in New Hampshire. He scolded us for our excesses, while reminding us that the economy is cyclical and will rebound in time.
But what will we have learned when this moment is past? Will students of the Dismal Science no longer see the "end of the business cycle" as the Holy Grail of economic polity? Will we accept that the cycles of economic life are a necessary--and ultimately productive--check on human tendencies toward excess and exuberance? Or will we quickly fall prey to the hubris of policymakers and pundits who will as we ride the next wave, assure us that this time, once again, things will be different.
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[Trying to get this up for three days...why?] "We have learned that there is no new paradigm." We? This is a pretty thin piece of reasoning at best, an insipid act of covering up at worst. The apologists for capitalism are falling all over themselves these days, with talk of periodic downturns, natural cycles, the ultimate wisdom of the market, the cleansing and purgative action of crisis; anything but systemic failure. The economy is not analogous to a natural ecosystem, managed by natural laws more multitudinous than we can comprehend. It is created and overseen by human beings who, unlike nature, which seeks the survival of the whole, are prone to selfishness, greed, deception, and then subterfuge after the fact. Explosions in the populations of locusts and lemmings are periodic peaks in natural cycles; the global economic crisis is wholly human in origin. Economic cycles are not facts of nature; insofar as they exist, they do so in an artificial context of human creation. Economists stole the Darwinian metaphor of survival of the fittest , inaccurately but adroitly, to justify selfish greed for a century and now they are trying to hide behind the ruse of natural cycles. Clearly the author cannot imagine a new paradigm, but we must: not to prevent the return of a natural cycle, but to show we won't get fooled again.
Well said. Also we should note that as new paradigms are created, old ones still apply. Just because the Physics Newton showed us was not complete and completely accurate does not mean that the newer Physics is any less applicable to the real world. One needs to know which paradigm applies when and where for any of them to be of use.
ripples, ................ and an occasional TSUNAMI !
Bring back the good old economic business cycle.
Feed us expansion and contraction of the money supply.
Job gains and losses.
Wage gains and losses.
Increase and decrease in poverty.
Whatever physical wealth is created resorts to those who control the money.
Where it trickles back down to "begin again".
Ahhhh. The normal, ordinary, capitalist business cycle.
Get used to it, America.
Or chuck it along with the debt-money system that brung it.
I hate to tell you this but there is coming a New American Paradigm. It is called consumerism will no longer fuel our GDP to over 70% and fuel the economies of rising industrial aged third world countries.
With oil prices rising, real wages increasing less than .5% per year since Paul Volker stepped down 25 years ago. Foreclosures shutting down the exburbia craze, and fewer college graduate jobs available in a declining work force, there is a new paradigm rising. The US dollar may lose its shine as the world's reserve currency unless a new paradigm is recognized. This nation must demand that multi-nationals that have taken their profits off-shore bring them back to rebuild a new Green and forward thinking industrial economy.
The sooner people realize that zombie banks need to get nationalized and American corporations need to bring back their profits in order to be taxed and that too big to fail mega corporations need to be broken up via anti-trust laws, the sooner this nation can rebuild and retool.
http://eye-on-washington.blogspot.com
On a recent first time visit to suburban Atlanta, after seeing neighborhood after neighborhood of new home construction it also occurred to me that there is no such thing as a new economic paradigm. All these houses were built by foreign workers. All these houses were built by cheap under-paid workers who were not the target market for all these houses.
The simple truth is if we paid living wages to the people who built these homes, we would not have over development and we would have been able to sell those home to the people who built them. A simple economic reality discovered by Henry Ford. The lesson: Fair wages promotes healthy capitalism. Artificially low wages leads to speculative unhealthy markets.
FAIR WAGES LEADS TO EQUILIBRIUM IN SUPPLY AND DEMAND. The simple truth is if we paid living wages to the people who built these homes, we would not have over development and we would have been able to sell those home to the people who built them. A simple economic reality discovered by Henry Ford.
The lesson, fair wages promotes healthy capitalism. Artificially low wages leads to speculative unhelathy markets.
Will we learn that deregulation of derivatives
ALWAYS CRASHES THE ECONOMY?
Shorts caused the Great Depression,
Credit Default Swaps caused this crash.
Obama you MUST ban Derivatives ASAP, like yesterday.
Will we learn that The federal governmnet has the sole right to print and create money?
Will we learn that the FED, the Federal reserve, Must be under control of the Treasury?
http://jimbernard.org/gpage16.html
Very nice article. But one could summarize the situation in three words:
1) Americans
2) Are
3) Whimps
Especially the ones who thought they had made it.
All of you are missing the biggest single reason for this downturn-INSTITUTIONALIED OVERBREEDING! 95% of environmental scientists believe the most humans the earth can hold is 3 billion people-yet we are at almost 7 billion. It is the simple law of supply and demand-as humans continue to overbreed, the price of labor keeps falling but the price of natural resources keeps rising as resources become scarcer.
The average person in an old tribal society, it is estimated, worked only 25 hours a week, including child care. Of course, in 1 AD when the world had only 300 million people, a living could be easily made because natural resources were very plentiful. Want to improve the standard of living for the whole human race-have only one child and tell your children to have only two. Wages will go up as people become scarcer and the price of natural resources will go down as there is way less demand. Join Negative Population Growth, a non-profit organization, and make it happen!
Please give us professional citations for your arguments. Especially the one about 95% of "environmental scientists believe". Science does not work that way and you will not get 95% of any science group to subscribe to any such broad hypothesis.
The genetic evidence speaks loudly against your Eden-hypothesis. We almost died out at least once. All other species in the human ancestry tree did and certainly not because they refused to work more than 25 hours a week.
In 1AD the world was going through a particularly favorable climatic period for the Mediterranean region. You are cherry picking data. But if you are complaining now, you would have been screaming if you had been an average Roman citizen, or worse, an average Roman slave.
To get a different perspective on how the severity of the housing/business cycle can be prevented you really need to read Henry George starting with "Progress and Poverty". It is very relevant to today. In fact several Georgist economists predicted this downturn to the exact year - 2008. And, yet, most economists will never talk about Henry George. Why?
GeoArk
Tax Pollution, Pay People. Tax Waste, Not Work. Tax Bads, Not Goods.
www.greentaxshift.org
I don't see what is cyclical about this global financial/monetary collapse unless you mean this is a kind of replay of the Stock Market Crash of l929 and the Great Depression. Both are the result of de-regulated financial institutions running wild with speculation and equally unregulated financial instruments.
THat it exactly. Without regulations folks tend to get greedy and take unwise risks.
OMG... please tell me that you both are like 15 years old... and your names are "Britney"?
Gov. can't never has, never will legislate morality. Greed is not all bad... OR the will to be rich has fed Millions... not Gov., but private people/organizations.
Also, speculation did not cause the crash, it was easy credit and over extended credit combined with the Gov. printing money to try to fix a normal and healthy down market... yes, sort of like what Obama is doing now...
From Reagan through that son of a Bush, American fiscal and trade policies coupled with the willingness of each administration and the Congress to blatantly deceive the American public (granted, a perversely ignorant and naive American public) have without question created millions of jobs and aided in the acquisition of enormous wealth. Yeah, the jobs created are in other countries and the wealth did wind up in offshore accounts where those reaping the benefits are able to evade US taxation. Was that the value of your life savings I just heard being sucked out of your account a and direct deposited into some fat-cat's offshore account. Yep, you betcha. After all, this is a representative constitutional republic ....right? Face it people, the present reality is that the rich wield the power and those less fortunate are just, well, less fortunate. So what are you going to do about it? Organize and act? More likely you'll fritter away all your time and energies worrying yourself to death instead. Democrat, Republican; what does it really matter when both are beholding to the same corporate, banking and private wealth interests? We all know what must be done if this condition is to be remedied. The question is: are their any Americans willing to make the sacrifices required for such a movement to succeed? I can just hear you now, "But I have a wife and family to think of". And the alternative is....? Next up...the media.
Exactly. Mr Paul ( The writer of this piece ) neglects to mention this current very deep recession / pre - depression is unique and is the absolute worst we've had in our lifetimes.In
the last few recessions- housing was the only thing that kept the economy going. This time however- The GOP policies of deregulation-trickle down & lack of control on banks / Wall ST and the markets, came together in a ' perfect storm ' to bring us to disaster. The losing / lost party, is now trying their best to blame the Dems and Obama. It won't work this time. Voters have been energized like never before and it feels great. We have to Ignore the ranting of Limbaugh, Hannity, Coulter, Sen John Boehner, saying the same old worn out crap we've heard for so many years- THIS CRISIS is what we have to show for it ! We must remain strong against the GOP wrath. They are desperate to regain POWER / CONTROL The powerful controlling interests who HAVE UP TO THIS POINT RAN THE US- since Reagan and his deregulation started. The GOP as a brand is slowly dying. This election proved that.. All they have left is the hard line GOP / southern states & Evangelicals who still think we are all going to hell.
Thank you.
I agree. EXCEPT, I'm afraid that there will be a backlash. Obama etc are spending quantities of money that are so big, almost no one can conceive of it. DEBT!! After he finishes the spending, I'm afraid the moderates will join with conservatives in hating of "big government", and the enslavement of debt we will then be under, and stage a comeback that will make Bush's neonaziism look like child's play. They're going to say "we tried to stop it, but those big mean dems wouldn't let us--we'll save your children... vote for us!"
"I promise you, I get it! [that's why we need more handouts for the banks, and faster... how can they trickle on you, if they're not overflowing with money? The rich must be made MUCH richer...] It's not about the banks, it's about the people."
"We all know what must be done if this condition is to be remedied."
I, for one, do not know what must be done.
I remember in the 60's people taking to the streets.
I don't know what will activate "the people" to such actions now.
What is it that "We all know"?
None of us want to be here.
What is the effective direction to take and not waste our energies against the entrenched?
Let's start by organizing locally; neighbor by neighbor, block by block, neighborhood by neighborhood, community by community. Find out who's with us and who's not. Then with the strength of numbers become a force to be reckoned with at the regular party meetings in our districts (Dem, Rep, and others too.) Question leadership's assumptions upon which its' strategies for moving ahead are based. This creates the sunlight in which corruption cannot survive. That's where it begins. Take back our communites then districts, then Congress. Once those in power recognize their days of going unchallenged are finished there will be no alternative but to grant serious consideration of the will of citizen constituents as opposed to solely those entities able to contribute heavily to their election campaigns. BTW, kudos to rwall for bringing up the issue of population growth. Single most influential underlying factor in why we find ourselves in our current conditions
First we start with a new Pecora Commission investigating the actions of the financial class over the last 30-40 years.
But how to motivate an entrenched Congress to act when that very action jeopardizes their prospects for re-election by exposing their very own as the criminal element so many of them appear to be based on their conduct? By that I mean investigating the financial elite will surely reveal the connection between members of Congress and those they truly represent as opposed to their citizen constituents. Congress is a pretty exclusive club. Representatives and Senators are all quite pleased to meet and discuss their ambitions with cash laden lobbyists but not so much with the American people at large.
John Jay, Washington's chief justice of the Supreme Court had an expression that embodied his philosophy, "Those who own the country ought to be allowed to run it."
I mean to say, the wealthy have always had great influence in this country. Jay's nomination was rejected by the Senate. They were a radical bunch in many ways; his philosophy, though acceptable to many, offended them. Essentially, you have only one kind of "rights." Those you are prepared to fight for. Class struggle is as old as human history. When people like the Bushs warn against it, they are still behind their "base" and mostly want others to yield without a fight.
None of this is meant to recommend the victory of the proletariat. We can expect such a victory to install a proletariat elite. To fight, to stand up for yourself, and, yet, at the last be fair is the best thing.
What is new is the creative financing of newly created worthless funds.
That coupled with the age-old problem of human greed was a recipe for disaster.
Its like trading with 'phantom money ' Deregulation policies of the GOP allowed & encouraged it all. Now we PAY the piper.
From your logic that this is just a natural cycle, and there is nothing special about this current downturn, you agree with Bobby Jindal that there is no need of government action. In fact, if anything, government action has somehow corrupted that natural cycle and may have made matters worse. Thus, from your logic, the Federal Reserve should have done nothing to stem this financial crisis.
I guarantee, if you were the chairman of the Federal Reserve, you would have made George W. Bush look like FDR and the unemployment rate would be approaching 20 percent by now.
There is a pointlessness about this article Mr. Paul. We are not going to get past it. Capitalism has finally failed as it was doomed to do from the very start and the 1930's almost crippled it but Capitalism made one last grab and put it off for a further 80 years. Now time has run out on us. Scary? you bet, but out of it will emerge some real enlightenment and we'll realize we never needed it in the first place had we learned to co-operate. We are one creature on one planet and when we collectively "get it" then, and only then, will we go with nature as opposed to competing with it.
Capitalism has been working loonnnng before this country was founded. Socialism is the economic model that has failed everywhere it has been tried. Why do you think China moved to a pseudo-private capitalist economy in the 1970's? Because they didn't want to end up like N. Korea or the USSR. Is Vietnam still socialist? Nope.
And you think it is natural for all people to live in harmony and share everything and not covet or try to make there lives better? What are you smoking?
Hoosier--Do you mean communism?
Social programs couple very well with Democracy and Capitalism
....hmmm, because Nixon and Kissinger opened the door?
hoover 96, capitalism is always surviving in the US because socialism is used to save it. What we need to see is socialism being used to soften capitalism, make it less brutal. Nobody needs a for-profit health care system; having to make a profit makes denying claims, rejecting people with pre-existing health conditions, having millions of uninsured inevitable. Successful agriculture is another human activity that isn't helped by making it a capitalist enterprise. Ag cartels are giving us global food shortages. Aside from these two and public police and fire departements, you can have everything else privatized, except for infrastructure, which should be public also.
People living in natural Harmony ? That would be lovely- but alas we have to live in the real world. Full of good, evil, love, greed
You're correct, of course. But no one in any major position in government or the media will own up to this fact. They're still too beholden to the powers that be (or perhaps we should now say "the powers that were").
Jack & yesman- NO- Capitalism did NOT fail - our so called ' leaders ' failed. Commerce and markets need common sense rules and regulations. Like it was for many years-until Mr Reagan decided to change every thing and take away THE RULES. That led to mass chaos & greed-as could have been predicted. Lets be clear: WHAT FAILED IS THE POLICIES OF THE GOP !.
Capitalism never paid its debt to FDR who gve it years more life with his controls on its excesses which were turned loose by deregulation.
FDR had common sense, decency and actually cared about the people
Unlike Reagan / Bush / Cheney-Wall ST fat cats etc....
Deregulation screwed us. If regulation of banks had been instituted, we would not be in this jam--loans would not have been passed out like candy to just anyone. Also, there's soaring health care costs--big problem there.
Yes, there are cycles but a lot of this mess could have been prevent with proper regulation and health care reform that should have been instituted many years ago.
Greed has consequences--we're living it now.
At the beginning of Bush's time in office. He in one bold move started the country on the path to this result. He gave a multi trillion dollar tax cut the the large corporations and the top 2% wealthiest in the country. He financed this by instantly using up all the budget surplus he had inherited, and released the social security tax fund back into the general fund. And wiped out the surplus that was there. Then borrowed the rest of the money. And yes unlike what the Republicans keep spewing tax cuts are real spending especially when you have to borrow the money to finance them. Yes Obama's tax cuts are spending. The government is going to have to borrow the money to replace the money. The difference being, the money put into hands that have below 50k income will just about be all spent, money that went into the hands bush put it in is a tax sheltered fund somewhere or something of that nature.
HOUSING BUBBLE BURST. That's what started this. OMG, please tell me you're kidding.
I agree and add "Easy Credit"... that is, people being allowed (driven by marketing and pop-culture) to buy and live beyond reasonable means...
Before the housing bubble burst - GOP policies of deregulation allowed banks / predatory lenders to give loans to unqualified buyers- with no money down or low income. They packaged these ' high risk loans' as 'mortgage securities' They sold them on Wall ST. The Profits were huge on both ends. But as could be predicted, the loans defaulted. Folks lost homes. Then- Banks flooded the market with low priced homes. That lowered the value of all homes in the area. It spread all over .
That perfect storm is what led us to this crisis. Without GOP policies of deregulation and lack of controls ON BANKS & WALL st - -thist would not have HAPPENED . A much smaller problem may have developed. that could have been contained.
As a Realtor, I saw it first hand .
GRIT- Yes Bush did all that. and went thru Clinton surplus in record time. Now the GOP is all of a sudden ' worried' about spending ? What hypocrits. ALSO Reagan lowered the TOP tax rate - get this- from 80 % ALL THE WAY DOWN to 30 %. ! That started us down a slippery slope-which put incredible added wealth into the pockets of a relative few. Bush started 2 wars- and decided the top 2- 3 % - even big oil- needed EVEN MORE TAX BREAKS !! So he gave another huge cut- the middle class got the leftover crumbs. The thing thats amazing is that MOST FOLKS ARE NOT AWARE OF THIS How can they make a well informed intelligent choice between candidates ? Because of deregulation - Banks & lenders could give E Z credit to almost eveyone. Why "
There were massive profits to be made, by packaging these low quality loans as 'mortgage securities' and sold them on Wall St. It all collapsed- like a house of cards- or a giant PONZI SCHEME. We were all DUPED !! .
Mr. Paul, excellent article. You may also want to add that during the past 25-30 years we have increasingly become a consumption-based rather than a production-based economy. It was only a matter of time until it caught it up with us. 1) Although improvements in productivity have been advantagous (as you mention), we are seeing less of a benefit because of our trade deficit and 2) As third world economies become richer it will be more difficult to maintain low prices on the backs of underpaid foreign workers. How does our economy become less reliant on consumption and the perils of consumer debt without the help of a central entity (i.e., government) setting policy and making investments in our future? It doesn't. That's why the Republican's hands-off economic approach (however poorly) articulated on Tues night rings hollow.
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