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November 19, 2008

Nothing to Fear But Fear Mongers Themselves

Have we been talked into a recession? There's little question that's where the economy is now and it seems to be spiraling deeper by the day as we anxiously cut back on almost everything and, in the process, help make our worst economic fears come true.

Did it have to be this way?

Just a few months ago we had mainly a severe problem with mortgages that should never have been written. The people who shouldn't have had the mortgages were losing their homes (or speculative investments); the people who shouldn't have bought the mortgages, including the companies that shouldn't have written the mortgages and the companies that shouldn't have securitized the mortgages, were in a lot of trouble.

But, other than housing prices which were arguably too high anyway, the real economy seemed to be doing pretty well. This being an election year there was a healthy dose of "stimulus" from Washington. Many more dollars than were in the stimulus program were saved by drivers who went on partial strike and helped drive the prices of gasoline and oil back to less than they were a year ago. Most of these were dollars that otherwise would have left the US economy so that was pretty much all gain.

So why are we having a recession? At least partially because we were talked into it. But who would want to do that? Who would want to spread so much fear that the mighty US consumer put his or her credit card under the mattress?

  • Bankers who wanted a bailout (and got it)
  • An administration that needed to justify bailing out the bankers
  • A Treasury Secretary with a bankerish POV
  • A Fed chief whose academic specialty was the Great Depression
  • The Democratic Party which wanted to show how bad things had gotten on the Republican watch
  • The McCain campaign which wanted to show it wasn't four more years of W
  • Those who would like to regulate everything in sight (forgetting that regulated Fannie Mae and Freddie Mac were among the worst offenders)
  • Those in Congress who didn't want the blame for pushing Freddie Mac and Fannie Mae to make worse and worse mortgages
  • Everybody else who wants a bailout and has seen that the threat of bankruptcy is the best way to get one
  • A press which is largely economically illiterate but can tell scary and sad stories well

Turns out there was almost a perfect storm of fear mongering and we got scared. Now there is a recession. Recessions happen when money stops moving (more on that here).

The consumer price index has fallen by a record amount month over month led by fuel and housing but other stuff is getting cheaper as well. The post-Christmas sales have started before Thanksgiving this year. Consumption has gone out of style – bad timing that.

If you're in debt, it IS a good time to cut back. Cash is king and we are at least partly in a deflationary time. But, if you have some money, it's not a bad time to go shopping both because you'll get good prices and because the economy needs you not to hoard. Want to be socially responsible, buy your family a fuel efficient car, furnace, or solar something or other. Good time to hire some people to do some work around the house you've been putting off. Good time to give to your favorite charity which is probably hurting.

Scary as it is, it's a good time to invest as well. We're somewhere between the end of the last bubble and the beginning of the next one. More fortunes'll be made by investing now and waiting patiently for returns than waiting for a safe time to invest.

Some ideas on how companies should invest are here.

It's also a good time for leadership – away from fear. Here's hoping we'll get that.

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