Economic Timing, part 1

October 7th, 2015

Your business prospers by the products you make, your growth, your reputation.  But every now and then, you will be defined by economic events you did not cause but by which you may feel some or overwhelming affects.  Without foresight, it may result in disaster or great gains with it.

How possible is practical foresight?

Greenspan didn’t foresee the housing bubble, though early on he did admit the possibility.  His instruments didn’t point to it.  A nice defense, who could know?  Greenspan laid emphasis on irrationality, which the rationale elite should have corrected, but argues that not even the IMF anticipated September 2008.  He also states that not all bubbles cause general havoc unless leverage is too high.

Bernanke blames the private sector for greed, carelessness, violation of regulation and maybe even violation of law.  Raghuran Rajan argues the American economy tends to go from bubble to bubble, fueled by unsustainable monetary stimulation.

One might say the government builds a fire and supplies the hot dogs.

General opinion is the disaster was a relaxation of regulations, such as repeal of Glass-Steagall in 1999, when they should have been strengthened.  Dodd-Frank is regarded as a crowning regulatory achievement.  But others say it is the worst distortion to happen to the American economy since wage controls in 1971 and that it puts us in an uncompetitive position in global economy.  Since 2008, we have fallen from 1st to 7th in competitiveness.

To many the government is merely setting right unfairness[1].  Criticism of the policy is pilloried as opposition to fairness.  Yet it was minorities who were a major object of the policy and who suffered the severest housing damage.  Worse criticism is reserved for those who foresaw and gained from the inevitable collapse.  This time the fairness was affordable housing regulated by HUD, marketed by Fannie and Freddie, all of whom encouraged relaxation of credit standards.  As early as 2002, Greenspan asserted it could lead to a housing bubble.  It led to the Great Recession.

It appears we are trapped by blinding instruments, irrationality from which we await help from the rationale elite, and accusations of cupidity should we stumble or worse gain advantage.

Praexis is readily defined by the tools we use, the analysis we offer or the reports we produce.  Yet few things come as close to defining us than what we do with economic timing.  Asked how we knew — we didn’t but we do look.  Neither prediction, irrationality, nor blame, there is something else sound and basic – illustrated by Porsche who locked foreign exchange rates, Southwest Airlines fuel.  I’ll take that up in the another piece on Economic Timing.

[1] Several years ago housing codes in California was estimated to be 20% of total housing cost.