The Recession of 2009
The night I heard Lehman was declaring bankruptcy (was a Sunday night, Sept 14th), The first thing that came to my mind was the huge global unemployment that will occur. It won't be the ones who made bad decisions borrowing money but will now effect ones who had nothing to do with bad decision making. I thought we would see significant deterioration in the job market in January... But to my surprise, it was evident a few weeks later when GE couldn't roll over their debt. Can you imagine a transparent, publicly traded triple A company having trouble borrowing money. Imagine what it is like for the private small businesses and personal loans. Companies can only reduce expenses and layoff employees to compensate for the lack of short term credit (used for payrolls) and funding uncertainties. Interestingly, everyone rapidly adjusted their spending habits but now this will cause further reduction in employment as companies have to adjust to current revenue/income streams. Unemployment will go up quick, I won't be surprised if we see 10% unemployment by the end of 2009. Many friends and colleagues didn't take me serious when I said this the following day but it appears, unfortunately, we may reach this number.
This steep recession gives Washington DC an excuse to spend and pass more egregious laws: we will get through this recession like we did in the 1800's and early 1900's without government help. What worries me the most is what the government planning to do now. I'm all for good regulation: Such as Credit default swap rules so we don't have another AIG. But in general, the more they get involved the worse off, as a whole we will be. Upon a brief view of the stimulus package, this will do very little for growing the economy. I can't get over all this policy and talk about consumption. Everyone wants to spend on all things but it doesn't give incentive to work hard and take entrepreneurial risk. So if we give incentive to produce (like cut corporate taxes, marginal taxes) then we will have "animal spirits" grow the economy.
Another problem with this stimulus package; we are borrowing money from the future which means we still have to work to pay it off some day. Moreover, we have proved many times over (in many different cultures) giving money to people for nothing does nothing for the economy. If there was such a world, we could give everyone a billion dollars each and no one would ever have to work again! Funny, but that's the logic Keynesian's really are saying. (By the way, Keynesian was a great Monetary economist and made great contributions to the field. To his credit, when he went to government conferences in his older age, he was the only one who didn't believe in his own earlier theories by growing the economy via consumption. He said "the only non Keynesian in Washington DC is me".). Clearly, this logic doesn't make sense!