Friday, November 28, 2008

The Perception Driven Recession

Watching the news last night was kind of stunning. NBC hauled out its financial reporter who basically admitted that she had no idea why the market was slipping or what might happen next. Over and over again we hear that people's fears have led them to stop buying, change their investment habits, and basically cocoon themselves. Part of the problem here lies in perception.

First of all, a significant number of Americans have no real living memory of "hard times." The last time we really endured those was during the 1970s. If you will remember, a Democratic president attempted to implement share the wealth programs that burst the budget, shredded the fabric of society, and led to economic problems that lasted until Ronald Reagan followed the ideas of Milton Friedman and led us to prosperity.

Since then the economy has done extremely well. Our standard of living has dramatically increased, even among much of the group considered poor. we talk less about the poor starving and more about the poor being unhealthily obese. Two minor hiccups aside, we have seen the most dramatic period of expansion in national history. However all economies are subject to cycles and apparently this period of prosperity is ending. But why?

For one thing, people have no context of economic difficulty. If you listened to the Bush hating media all you heard about was how hard the economy was. A period of unemployment under 6% would have been considered amazing in the Carter years, but during the presidency of George W. Bush it was the Great Depression all over again. Those that actually lived through the Depression probably laughed at such claims. Media driven perceptions made people believe that the economy was bad when it was not. we had expansion during wars, attacks on our soil, and Katrina. These shocks individually would devastate an unsound economy.

Then came real problems. The sub prime mortgage crisis, driven by Clinton era mandates, weakened the financial sector. Add to that the energy bubble (now thankfully deflating) and you get a double whammy. Still in and of themselves, these should not have wrecked the economic ship. Perception has caused near panic to take place in investing and major purchasing. This brought on the specter of a very tough recession, tougher than necessary. Certainly Bush and Congress have done a great deal to help restore confidence, but it has not been enough to offset the damage inflicted by the media.

Hard times are difficult and people will have problems for a time. The only positive that can come from this is that it will give the current generation an understanding of what economic trouble really is. We are certainly not headed for a Great Depression or even a 1970s type recession, unless Obama tries to tax us out of our problems. However we must remain confident and optimistic that in the long run we will endure and return to prosperity again.

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