Posted by
Andrews on Wednesday, February 18, 2009 3:45:41 PM
In the past, I have argued that a large part of our economic troubles come not form technical issues, but from pessimism. The media, which so ardently talked down the economy throughout the Bush administration, created a self-fulfilling prophecy, and started a popular panic which helped to turn a weak economy into a collapsing one. Now, with Obama at the helm, they are trying to talk it back up, but finding that much harder. (Then again the panic may serve Obama, as it justifies any intervention he might wish.)
Today, I was reading the
WSJ editorial pages, and found this quote:
The Fed and FDIC, formally or informally, had already guaranteed the
deposits and other liabilities of the banks. Bank runs were off the
table, so even if banks were technically insolvent, they could stay in
business and have an opportunity to earn their way out of trouble.
Withdrawal of investor support for the securitization of credit-card
loans, auto loans and jumbo mortgages does present a big and somewhat
related challenge (one the Fed is addressing), but otherwise the
economy is not being starved for bank credit.
On the contrary, month after month, the National Federation of
Independent Business, the authoritative small business trade group, has
reported deepening pessimism among its members -- and yet no credit
crunch. "Fewer loans are being made, but a substantial share of the
decline is due to lower demand, not problems on the supply side," the
group reported along with its just-released January survey.
The dynamics of our rapidly decelerating economy are not a mystery.
Fear begets fearful actions. Employers cut costs and refrain from
hiring. House shoppers pull back. What were good credit-card loans on
bank balance sheets become bad ones. Good mortgages turn into bad ones.
Nobody wants to buy a car, so auto jobs are lost.
To blame politicians is at once churlish and unavoidable. Nobody
really is in control of the dynamic. Economists and philosophers talk
about "path dependency" -- how a small act can shunt events onto one
path or another, producing a cascade of consequences that were far from
inevitable.
It is nice to have not just editorial writers, but also professional organizations supporting my belief.
Of course, the one question this does raise is, if the recession is largely psychological, is a bailout the right cure? Especially when so few have any faith that the bailout will work? Isn't that just a recipe for wasting money to no good effect? (Though it may add massive inflation to our list of real problems.)
POSTSCRIPT
My relevant posts are:
Inventing a Crisis
Inventing a Crisis II
Inventing a Crisis III
Perception and Reality
A list of other posts on our economic woes can be found at the end of "
Not Entirely to Blame".