The Latest Poll Shows: It's a Recession!

photo by marshlight

President George W. Bush is famous for saying he doesn't pay attention to public opinion polls.

Many reasonable people think that this is arrogant – democratically elected leaders should not flout the will of the people who elect them, critics say.

But perhaps there is some wisdom in Bush's policy against reading polls.

What I'm getting at is: Most people just don't know that much stuff, and polls must reflect that. That is, in many cases, polls are asking people about things they simply don't know very well.

Imagine if a pollster called you and asked, "Is the economy headed for a recession?"

You're smart, sure, but do you know what a recession is? Troll your memory for a second. Formulate a guess.

Going by that most reputable of all sources, Wikipedia, a recession is defined in two ways.

Economists say: "A recession is a decline in a country's real gross domestic product, or negative real economic growth, for two or more successive quarters of a year."

The National Bureau of Economic Research says: "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough."

Did you guess right?

Knowing whether the American economy is in recession requires knowledge of the definition of "recession," as well as the directions of GDP, and perhaps income, employment, industrial production, and wholesale-retail sales.

Knowing whether the economy is headed for recession requires all that, plus advance knowledge of what will happen in the future.

So you'll excuse my skepticism when I see a poll that announces, "Majority of Americans expect a recession." I don't think the majority of Americans even know what a recession is, let alone whether one is on the horizon.

There are many things that the majority of Americans are expert on: how to speak English, whether they are happy, and whether they like their cars and houses, for instance.

But when a pollster calls and asks the majority of Americans a bunch of questions that baffle economists, we ought not to grant the results much credence.

Short Memories

As the Bear Stearns debacle from a couple weeks ago begins to play itself out more thoroughly, American taxpayers must be wondering: why are we funding the bail out of financial institutions who made bad bets on the stock market? And really, not just bad bets, but stupid, pyramid debt schemes that by the laws of nature would have to collapse under their own weight just like classic Barbie would have to walk on all fours.

The Fed stepped in and assisted JP Morgan Chase in the acquisition of its one-time competitor to put ol' Bear back on its feet, mostly to appease the yowling of its investors who cried a thousand emo tears when they saw their stock prices drop to $2 a share. Don't worry, the Fed bumped it up to $10, and we all footed the bill.

It's really not just that though. The Fed has reinvented its responsibility in this new age of financial moral hazards. It has now decided to lend directly to commercial banks, a role it never held before, and to intervene as it sees fit to keep these behemoths afloat.

It claims to have more oversight too... it better, if it plans on tossing out $30 billion buy outs like water. Chances are though that the new Fed oversight still won't amount to much in the way of regulation, which means that debt will be bought and sold in new, fancier packages that simply can't help but attract investors like small children to a sharp, shiny object. They don't even NEED to control themselves, because Uncle Sam will be there to set them on their feet again.

To be fair, the government HAD to bail out Bear Stearns. Frankly, it should have stepped in earlier to avoid the collapse of the company, but in either case, Bear was too well-connected in the markets to let fail. It had a finger in every pot that would have essentially amounted to a bulldozer effect on our already slumping economy (r-word, anybody?), and that, at least, the Feds couldn't just stand by and watch. It also shouldn't have let that happen in the first place.

Really, though, the most egregious bit of this is that there should be no reason for it to happen.

We've seen it all before. There was the Great Depression, caused in part by people buying stock with money they didn't have. There was the 1970s collapse in Latin America where the amount of debt those countries were racking up made total sense... until interest rates went through the roof and debt services became almost a laughing matter. Let's not forget the collapse in 1994, or, my favorite, the 1997 Asian Financial Crisis where Thai banks got short term loans from international banks and sold the money as long term loans to primarily real estate investors at home for ridiculous interest rates. That system collapsed when the short term end of things dried up and investors, spooked, began pulling money out of Asia left and right, even though other countries were anything but insolvent, or even risky.

The point is that investors don't learn from history. Or maybe the point is that they do – the moral hazard, the assumption that the government is going to take this sticky business off your hands if your big risk falls through (and that you'll direct your profits overseas to avoid taxation if it doesn't) has been almost a given for so long that investors have to think it's written in the rule book. Coming up with new and interesting ways to sell debt abroad has its uses, but when the company has nothing to lose and everything to gain, risky behavior is assured.

In an ideal world, and my crazed liberal mind, what we need is international regulation of financial centers, preferably stemming from the WTO as an update on a matter that has taken a backseat to agricultural subsidies and free trade back biting. At the very least, domestic regulation that can ensure that these companies will sink or swim based on the soundness of their decisions is absolutely critical to curtail corporate welfare and make sure that Americans are supporting an America they can be proud of.

photo by Azrainman