What's A Recession Anyway?

There is so much talk about the current recession. Is it over? Close to being over? Will it get worse? Yada Yada Yada...

There are even the Nitwits on CNBC proudly proclaiming that the recession is over, to this I can only say, please enroll at City College, and take the Economics 101 Lecture Class, they will get into what a recession is in the first 15 minutes of the first lecture. I promise you....within 15 minutes!

But let me save you from applying for a Student Loan that you will never completely pay off anyway....you don't really need to enroll at good all City College, to understand what a recession is.

Before I go on to give you the clinical/academic definition of what a recession is, let me just state the obvious first.

Hint: Supreme Court Justice Potter Stewart once said about Pornography can also be loosely said about recessions.

"I don't know what it is, but I know it when I see it".

First of all we are in a deep recession, we have for the time being (TICK TICK TICK) averted a depression, but I fear that is just inevitable. It took Trillions of money that the government doesn't have to prop up failed/bankrupt financial institution's just so we narrowly escape a depression. The powers that be are totally oblivious and downright clueless about the collateral damage that will arise from the socialization of bank losses and endless expansion of the Treasuries balance sheet, which is close to $1.7 Trillion at the moment. When does it become apparent that printing money to give to zombie banks is really cutting your own wrists?


OK...Back to what really is a recession?

There are two types of recessions.

The types of recessions are:

1-Inventory driven recessions. (Most common)

2-Credit driven recessions.

The last material credit driven recession was in the 1930's (Great Depression)

Inventory-driven recessions are primarily about excessive industrial capacity for demand. That is, manufacturer's and suppliers of services get too optimistic about prospects, build too much capacity and inventory, and wind up engaging in a destructive price war in an attempt to win and gain market share. This drives down profits and ultimately forces the weaker firms out of business, hence recession, where GDP and employment decline. Having cleansed itself of the excess, the economy eventually recovers. The reason for these type of recessions is often(but not always) an external shock such as the oil embargo in the 1970s or the collapse of the Internet/Telecom/Tech Bubble in 1997-2000.

The second type of recession is a credit driven recession. This happens when excessive credit is created, like ARM Mortgages, Asset Securitization, CDS, and sub prime financing, which leads to a asset bubble. All of this is created by cheap financing. These bubbles pop when effective interest rates in the economy reach an effective level of zero, usually because the amount of leverage available becomes for all intensive purposes infinite. I have railed against the idea of leverage being the primary catalyst, leverage by itself was the trigger, but the complexity of financial derivatives was the gun powder. The more complex the products being created yielded exponentially more leverage....That's how it works. This excessive credit creation drives a speculative asset bidding war which in turn causes prices to go sky-high for one or more types of asset.

Recessions cannot end until the conditions that caused the recession are removed from the economy. Bottom line correct?

Going back to the Inventory Driven Recession, growth returns when enough capacity is destroyed through layoffs and inventory selloffs to bring capacity and demand back into balance. Employers then hire new workers and the economy recovers. This is precisely what happened after the .com bubble and 9/11 tragedy. They let the normal business cycle take its course.

But..for Credit Driven recessions to unwind and resolve itself, one very important thing needs to happen....Drum Roll Please....

Default and bankruptcy clears excessive credit (debt) from the financial system normally if its allowed to do so. But if it is not, then the bad debt remains on the balance sheets somewhere and the cash flow impact remains in the economy. Employment remains weak, capital spending restart attempts falter as demand fails to return and credit quality continues to remain insufficient to support new credit demand.
The consumer is about 70% of our economy, and real savings is 0,no matter what the government tells you. Consumer gets paid if they are lucky, then they use their paychecks to furiously pay back debt...where is the savings??? All of this has led to a negative 5% or so decrease in "Real GDP".

Consumers are not saving, they are paying down debt in a furious attempt to avoid defaulting on nearly $1 trillion in outstanding credit card balances that have gone from 11% interest to 29.6% along with OptionARMs that are experiencing a tripling of payments while the home's value is underwater and precludes refinance, all while consumers are being laid off by the hundreds of thousands monthly.

What am I saying? Very simply:

Governments Lie but Math/Facts never do.

I must sound like a Broken Record already.

The government is doing everything in its power to avoid the banks and others having to take their medicine, that is, to allow the excessive debt to be defaulted. We have in fact shifted more than $2 trillion dollars of actual bad debt onto the Treasury and Federal Reserve rather than allow the market to declare it defaulted and force those who hold too much of it into bankruptcy, and we continue this asinine and exactly backward program to this very day.

This is an utterly idiotic absurd policy because the condition that led us into this recession which is excessive debt must be removed, not shifted around and hidden, before the recession can truly end.

We are falling into the same trap as Japan did in the 1990's. The Japanese failed miserably and the Nikkei like the Titanic, has never seen daylight since then.

Japan's economy never managed to get materially out of its deflationary mode and is now back in it as a direct consequence of their refusal to force the bad debt into the open and default it.

Bernanke is a student of history and the depression, but he fails to see what happened just most recently?

We are going to suffer the precise same fate for the precise same reason unless our government and economic leaders stop hiding the bad paper and force it out into the open where it will default and be removed from the economy. Stop with these stupid programs that make Blackrock/PIMCO buy shit mortgage paper.

The media has its love affair with Obama. Nothing he does is wrong, but in fact he is enabling Bernanke/Geithner to do what is opposite of what needs to be done.

Obama is enabling/hiding bad assets on his balance sheet, allowing banks to hide bad assets on theirs, and refusing to expose the liars, cheats and frauds from defaulting and clearing the system of bad debt. He is doing this because he is protecting those who wrote all that bad paper, mathematics be damned, and if it doesn't stop we will at best play Japan and at worst have a Depression far worse than the 1930s.

We are still in a bad recession. Employment will get a lot worse. Credit needs to be zapped out of the financial system. Deleveraging is still in the 4Th or 5Th inning.
Bank losses are still being put on the backs of Tax Payers, who are also the same ones being foreclosed on.

There is just something Karmic about the whole crisis.