Economy 101: From Greenspan to Spock
By Martin Brown
My regular readers know not to expect me to serve as another siren of economic gloom and doom. I make no apologies for being wired for optimism. Let’s look realistically at the economy trend and the economy business cycle.
Certainly we are passing through a period in our history where the bears on Wall Street and the pessimists on Main Street are having their time to shine. For those who cling faithfully to the dark side these are bright days indeed. Between higher rates of unemployment, sagging consumer spending, investors rushing for the safety of Treasury notes, and real estate mired in a foreclosure crisis, financial optimists are being tested more vigorously than they have been in eighty years.
However I, and many others, remain optimistic in the face of this tsunami of bad financial news. Here are three reasons why:
1. Economic cycles swing sometimes gently and at other times far more violently. Undoubtedly this is an example of a far harder swing, one that is causing considerable levels of displacement in a wide set of financial indicators. At the top of that list is the banking and credit industry. Whatever other moves are made, from the Stimulus Bill, to plans to stem the effects of the housing market meltdown, addressing the stability of the banking industry will have to be a top priority in the coming weeks for the Obama administration.
As this occurs it will allow for a reorganization of a wide variety of financial market oversight that have all but lost any form of governmental regulation in the past decade. Whether you’re talking about a Bernie Madoff running a $50 billion ponzi scheme under the guise of being a financial house, or banks placing risky bets on billions of dollars in home loans without adequate collateral to justify these high-risk decisions; a re-invigoration of regulation for our financial markets is badly needed.
2. Pruning the corporate tree is good for the health of the whole economy. No one said that economic upheaval is a pleasant experience, and as we see certain business die and other business take flight during this time of transition it’s similar to watching what a good storm will do as it passes through your neighborhood. What the gardener won’t prune, frequently Mother Nature will and the winds of economic change are stripping the trees bare of the less efficient and the outdated. There has always been a myth that only government agencies grow bloated, inefficient, and bureaucratic.
In truth private companies big and small are subject to the same decay from within. On the other hand look at the other side of the coin. The February issue of Fortune magazine highlights America’s “100 Best Companies to Work For.” A list compiled by Fortune that contains some amazing stories that provide a huge reason for hope in these down times. Featured companies like Zappos.com are taking old corporate models and completely re-inventing them. Even though Zappos has suffered a downturn since consumer spending fuels their success, look to new companies like Zappos to come through this period newly invigorated and paused for dynamic growth as the economic growth restarts.
3. All economic cycles also suffer and benefit from human nature. Recessions tend to play on that side of human nature that dreads uncertainty and causes us to stop spending thereby heightening the effects of a downturn. Expanding markets play on the other side of human nature where we can become overly confident that prices will simply keep rising securing a good return, we reason, for almost any market bet we place.
Perhaps this was best described in 1996 when then Fed Reserve Board Chairman, Alan Greenspan, referred to the explosive growth of the emerging Internet and high tech sectors as evidence of “irrational exuberance.” We would like to convince ourselves that markets move up and down on sound dispassionate mathematical realities. Not true. As that famous Vulcan Spock would regularly remind Captain Kirk, humans are often irrational creatures. We lose too much confidence in a down market and show too much enthusiasm in a booming economy.
I remain, very much an optimist. For all the economic pain that we all witnessing right now, we are seeing the financial equivalent of what happens when an individual decides to build up their body to make it stronger. Old structures, just like muscle fiber, get torn down, and in its place come new, healthier growth. It’s really true that with any gain, there are varying degrees of pain. The good news is that the new economy, which will emerge as we move into the second decade of the 21st Century, will be better than the old economy that we are leaving behind.