Monday, September 10, 2007

Maybe it is Time for a Recession

The word RECESSION, it mere utterance, conjures up images of pain and suffering. For many, recession mean jobs loses, lower standard of living, bankruptcy, and a promise of hard time to come; therefore, recession must be be avoided. However, recession is not something that can be avoid, as it is a natural part of market, and it is a natural part of the business cycle. Economies must expand and contract to be healthy in the long run. It cannot be expects to only expands because like a balloon, eventually it will burst. Nevertheless, the fear of recession is a real fear as it equate to loses for all, and with such fear, people have come to expect that the government, or the central bank, should play a role in preventing recession. Government, its central bank, certainly have weapons to fight back recession, but should it or how long could it?

Recession, although bad in many way, is a necessity to growth and development, and it is something that all healthy economies cannot do without. Recession help to eliminated the less productive sectors of the economy, weeding out the weak and less competitive firm. Recession cut excess from firms that been expanding to rapidly while forcing the need for more efficiency and productivity. What a recession does for an economy is to clean house, leaving it stronger afterward for growth. Recession is another part of Creative Destruction, an evil that we cannot do without.

If we look back at the late 1990 with the burst of the dotcom bubble and rapidly falling stocks prices, the United States was about to faces a recession, but the central bank avoided this by pumping a huge amount of credits into the market which had prevented a potential recession. This, however, in effect created the housing bubble that follow. Secondly, it allows firms that should of been dead to continues operating using borrowed funds, living off credits to cover it selves. Thirdly, this further boost the raise of private-equity and hedge funds that now operate largely on borrowing, and, farther more, these funds help keep weak and unproductive firms alive by buying them up. Finally, the excess loans that bank hold leave them extremely expose to the risk of default, and a recession would serves as a reminder to various banks to be reponsible lenders of funds. The United States, in essences, have been living on borrow times, and now times is catching up. The real estate market is extremely weak with a large amount of bad mortgages loans from various banks and funds, the stock market is unstable and declining, and more importantly, consumer and investor confidences are dropping. The Fed is worry about inflation, but the market does not seem to be as strong as the Fed has though it would be. Raising gas prices as well as the problems from "made in chine" has also farther undermine consumption.

As a final point, the US economy, thought, still remain optamistic in the hope that its low unemployment rate is a good indicator that it can fight off any major crisis in the face of a failing housing market. This path of thinking is going to cause the US economy much as raising unit labor cost, a shaky financial sector, and inpending tightening of loan should say otherwise, as these things directly impact the outer layer of the labor market (labors that have low hiring and firing cost).

From the look of things, it would not be surprising if the US does go into recession in the near future, but is that so bad? Maybe it is time for a little recession. The US market has been weak for the past decade with little innovations and changes, and US unit labor cost has been on the raise which mean we are becoming less competitive relative to the rest of the world. The credit market is finally starting to catch up to the actual market, and the problems the US created back in the late 1990s is starting to come back. So maybe it is time to face up to it and clean up the US economy. What people must understand is that the central bank job is not to prevent recession, but to only shorten its spell. Recession is a part of market and a part of growth, and it is not something to avoid, only limit.

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