Bubbles can be very positive and fun. And, I’m not talking about an old girl friend. The bubbles (lower case b) I’m talking about are those serendipitous pockets of growth that our economy jumped on to soar out of the last two recessions in a V-shaped recovery, in contrast with the so-called L-shaped recovery we are now in. (Actually, it seems more like a flat line, not a true recovery, but a new normal – as good as it’s going to get for as far out as we can see. But I digress.)
It would be a wonderful thing if we had something like the technology and internet bubble that floated us out of the 90s recession, or the housing bubble that catapulted us out of the Turn of the Century recession. In the diagram below, courtesy of Goldman Sachs, we see the “real potential GDP” line that shows how quickly a bubble might help us grow out of a recession based on those past experiences.
Essentially, GDP growth out of the previous recessions averaged 6% per year, while real GDP growth coming out of the current recession is a muddling 2-3%. Another way to look at this slog we are in: of the four deepest post WWII recessions, three years after they began, real GDP was 7.6% higher than pre-recession GDP. Now, here we are, almost four years since the beginning of this recession and GDP is up only 0.1%.
Wouldn’t a new bubble be great? Maybe we could find one that, like our housing bubble, could help the rest of the world as well. And, how terrific it would be if we could make “forever blowing bubbles” an infinite way of life around the globe.
However, there is just one problem with this idea. The creation of a new bubble is preceded by the popping of an existing one, and a nasty economic collapse.
So, the Good News, Bad News Thing
On the other hand, our government, with the use of public money (i.e. our money), has the wherewithal to manage a deleveraging that would avoid an apocalyptic crash (depression). And, of course, a lot of the deleveraging involves rescuing financial institutions, even though they were responsible for much of the housing bubble. Of course, there was also the rescue of General Motors, AIG and others, to say nothing of the trillions of dollars we’re printing and borrowing against to create a “Keynesian” shower of money across the land, to “create” demand and jobs or some such thing.
As an aside, it would be somewhat comforting if we knew they were proactively using intelligent levers to do all this. Unfortunately, we learned that much of the rescue happened by default, sheer panic, not knowing what to do, and throwing solutions against a wall to see if any would stick. Certainly the trillions spent have not significantly moved any needles other than the national debt numbers. Not a pretty picture.
And now it looks like Europe, which jumped onto our housing bubble, is trying to take a page out of our “Keynesian” playbook to avoid a deep recession brought on by debt payment defaults by many of its countries, and the failures of many of its banks. And, the jury is still way out on whether their similarly reactive and questionably cobbled together levers are enough to stabilize the financial, economic and growing social turmoil in the politically unconnected countries of the Eurozone.
So, I guess at least avoiding depression by accepting a period of deep recession, while we either search for and find a new bubble or accept the new normal we are in, is as good as it’s going to get for a while.
Kicking the Can
However, the danger of bubble-hopping, or even of merely muddling along, as we are now doing, is that it defers any meaningful, long term structural or “bite the bullet” changes that need to be made.
Worse yet, as we see playing out currently, is the fact that we have zero political leadership, zero capability to collaborate globally, zero insight into what the next bubble will be and, finally, essentially zero tenacity to wade in and get the hard things done.
Do You Wonder?
Does all of this make you wonder if the structure and process of our current government, not to mention our current model of “free-market” capitalism, are seriously flawed? How many times and in how many ways do we need to hear, read or see how sclerotic the government is and how wildly on another planet our financial industry is, before we realize how deep in the proverbial “doo-doo” we are.
The Economist wrote: “You know something is going to happen in a horror film when someone decides to take a late night stroll in a forest. The equivalent in finance is a bank boss insisting that his institution is completely solid.” I would add that it’s also like when a politician promises something. How do you know he’s lying? His lips are moving. And why the lies? Because the politician’s number one concern is getting re-elected.
And, just as bubbles blow us up until the economy pops, think about how our flawed system manages deleveraging rather than allowing a cataclysmic crash. Imagine General Motors going “poof,” or AIG and other financial firms and big corporations collapsing. We say, thank God, it would have been another depression.
But, I ask you, has it not historically been the case in life, that when our backs are against the wall, we toughen up to survive and to find out the reasons why our backs are against the wall? And then, upon identifying those reasons, fix and/or make the really big, fundamental changes so our backs will not be against that wall any time soon?
I’m not suggesting we need another depression to get us to make the hard game-changing decisions.
I am suggesting, however, that we pretend our backs are really against the wall, right now, and that we stop being satisfied with an anemic economy while waiting for the next way out. Like Godot, it might never come.
However, without strong, intelligent, assertive and visionary leadership, kicking the can down the road will continue to be our strategy for survival.
Unfortunately, the great big assumption here is that there will always be a road to kick the can down.
See? I told you I’d look on the brighter side.