Saturday, November 29, 2008

Could The Coming Depression End Up Being...Not That Bad?

Okay, I will probably once again end up eating crow for saying this. But I would like the throw out the possibility that we have now sufficiently scared everyone into just how bad a downturn we're in and that may end up being...not quite as bad as the worst fears.

I'm not saying unemployment won't continue to increase. I'm not saying there aren't still liquidity and credit problems. I'm not saying we won't have at least two more quarters of negative GDP. I'm not saying that the consumer is going to wake up tomorrow and suddenly realize it's okay to go on a spending binge. I'm not even saying we've seen the last of the declining home values, which precipitated all this mess.

I'm not even saying that Paul Krugman is wrong to say we are entering an era of Depression Economics. After all, he's a Nobel laureate. What do I know?

All I am saying is, it seems to me that the American consumer is a) scared shitless and b) having trouble tapping into credit. The former is a bad thing; the latter is actually not so bad. And given the way that Obama has reassured the markets this past week, what would happen if Obama's administration hits the ground running in January with a similar level of calm reassurance?

What if the end of January sees the markets start to recover, and a Dow back over 10,000, even as unemployment continues to rise, all as a result of restored confidence in our leadership? After all, this would be the expected bust/recovery pattern.

Wouldn't that both a) make consumers a little less scared and b) help out struggling financial companies whose beaten-down stocks are driving down their cash reserves, and encourage them to be a little less stingy lending out their dough? In other words, wouldn't this take the vice off the consumer spending freeze, and get the consumer shopping a bit more again?

And wouldn't that be the kind of good news that would signal a recovery on the way, and encourage businesses and others to invest? Not to mention the 700 billion of stimulus that would be headed our way?

Again, not that 2009 won't open with pain, unemployment, soup lines, and foreclosures headlining the news. But 90% of Americans will still be working. And once they realize the world isn't going to fall off a cliff, they may start doing again what Americans do: living their lives, and spending what it takes to do it.

In other words, I'm just wondering if the financial crisis isn't being exacerbated by a crisis in leadership that's creating a much larger crisis of confidence - a George W. Bush crisis. Once we have new leadership, a leadership that seems completely on top of things followed by a natural turning of the financial cycle - the end of 2009 may end up looking nothing like the end of 2008.

Then again, if I'm wrong, crow may be the only thing I'll have around to eat.

UPDATE: Then again, we could just take Latvia's approach and arrest everyone who reports bad news.

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