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Good New​s, Bad News ...

November 6, 2008 By:
Fred D. Snitzer, JE Feature
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The new president will confront some good and bad news about the economy. First, the bad news: We may experience, according to some economists, a severe and prolonged recession, one that could last through 2009 and see the unemployment rate rise to more than 8 percent.

The good news is the same -- we may experience a severe and prolonged recession, one that could last through 2009 and see the unemployment rate rise to more than 8 percent.

This is bad news because companies will fail, people will be fired, and lives will be uprooted. Consumers, scared to death, will spend less, making the situation worse, a phenomenon characterized by the famous economist Keynes as "the paradox of thrift." There will be real pain and suffering.

This bad economic news is good news because -- and, admittedly, this is a low standard -- having a severe and prolonged recession means we won't be having a devastating and protracted depression.

And, at least, that 8 percent unemployment means that 92 out of 100 people will be able to find work.

It still remains to be seen if the aggressive and unorthodox response of the federal government to the present crisis will work, but it has to be better than what the government tried in the Depression: doing almost nothing for three years, then making matters worse by instituting protectionist trade measures and trying to balance the budget by raising taxes.

Even if it's accepted wisdom that today's actions by the federal government were the responses that should have been taken during the Depression, it is not a slam-dunk that these are necessarily the correct actions for now. Assuming these measures do work, there still may be a painful cost to all of this government action, especially if it was unavoidable.

No one knows what will be the effect of having the government take ownership stakes in previously private banks, with all the potential for intrusive political mischief. Just as the Fed cured the tech bubble with lower interest rates only to create a housing bubble, so, too, will the federal government save one quasi-governmental institution (Fannie and Freddie) by sticking its claws into the banking system.

The current crisis has financial pundits asking a simple question: Did markets fail? It would seem to be an obvious question with an obvious answer (yep), but, predictably, there are no obvious answers right now.

This financial meltdown, in the midst of a tightly fought presidential campaign, has created the conditions for a perfect storm of blame, accusations, counter-accusations and more blame.

Democrats say that, of course, the markets have failed, and if it weren't for the free-market, anti-regulation ideology of the Republican Party, we wouldn't be in this mess. Preventing the regulation of the derivatives market and failing to insist on greater transparency let loose an orgy of irresponsible behavior. Repealing the Glass-Steagall Act made things worse.

Republicans counter that it was the Democrats who protected Fannie Mae from more regulation and oversight when Republicans pointed out that these companies were taking on too much risk, potentially at the expense of the taxpayer. This was not a free market, they say -- it was a market distorted by government interference for political reasons. Also, without the repeal of Glass-Steagall, Bank of America would not have been allowed to buy Merrill Lynch, nor would J.P. Morgan have gotten Bear Stearns.

Who's to blame? That will take time and perspective to truly answer. But we can't figure out this crisis right now, because we're still living it, day by day.

It's as if someone asked Abraham Lincoln to write a history of the Civil War in 1864.

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management. For information, go to: www.prudentmanagement.com.

 

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