Jon Markman

SuperModels10/25/2007 12:01 AM ET

Why we need a recession -- soon

Bankers and government officials have plenty of tricks to put off the inevitable until at least after the November 2008 election. That's too bad.

By Jon Markman

America has a new mania this fall: recession-obsession disorder. If you just arrived from a visit to the International Space Station, you'd be excused for thinking that the U.S. economy is about to plunge off a cliff, with widespread unemployment, massive piles of unsold inventory, corporate profit growth in full-speed reverse and hundreds of bank closures.

Check out the headlines. In Oklahoma: "State remains insulated from recession fears." New York: "Markets bomb on recession fears." Texas: "Mexico well prepared to face U.S. recession." Milwaukee: "Harley CEO uses 'recession' word to describe woes." Oregon: "Oregon poorly prepared to weather recession." Illinois: "Caterpillar warns of U.S. recession."

When there's this much smoke, usually there is not just fire but a raging hell storm about to be cut loose. And Lord knows, there's as much dry tinder available to the forces of financial doom as on a Southern California hillside, what with residential construction stopped cold, Detroit automakers idling and virtually the entire financial-services work force dusting off résumés.

So is the inferno really upon us? Well, no. Not for a few months to a year, it seems, due to the Jedi mind tricks that bankers and government officials are able to play these days. And that's a pity because recessions serve a wonderful purpose in the economic ecosystem. They clear out the excess optimism, debt and inventory that collect during long stretches of expansion and worldwide happiness. Moreover, a recession delayed may be a recession that turns into a real whopper.

Banks and their junkies

There must be a recession eventually, after all. It's just math. Banking analyst Richard Bove over at boutique brokerage Punk Ziegel points out that debt in the U.S. economy over the past five years has grown at a pace three times faster than income. Nominal gross-domestic-product growth has advanced at 3% while financial debt has grown at a 9.7% clip to $13.8 trillion.

That is an unsustainable pace, the type that typically leads to the big splats that academics call recessions, as consumers collectively quit spending, retailers see inventories pile up, manufacturers fire workers, unemployment explodes and wage growth collapses. Yet the progression of pain takes longer than ever these days, according to economists, because lenders have new ways to keep the debt Ponzi scheme going.

Just as heroin dealers are in business to sell drugs, banks are in business to make loans. Their financial engineers will do everything in their power to force debt down consumers' throats -- and then find ways to keep them on the hook for it as long as possible. Although they talk a big story about encouraging responsibility in borrowing, they actually want consumers to max out their credit cards and to take large home-equity lines of credit, small-business loans and car loans, with the goal of having customers pay interest as long as humanly possible.

Now you would think that ultimately all this money has to be paid back, and you would be correct. With consumer debt-to-savings ratios stretched to historic levels, that time should be now. But that is where the Jedi tricks come in. Because the administration in Washington knows that if all those loans are called in and consumers can't make good on them, there will be hell to pay. And a nasty recession just won't do in an election year.

Election tactics

So the government is in the process of twisting the arms of Federal Reserve Board members to lower interest rates by as much as 2 percentage points over the next year, including potentially a whopping half-point cut next week. That will allow banks to go back to one of their favorite recession-delaying ploys: encouraging debt-strapped consumers to refinance their loans at lower rates.

If that doesn't work, the government has been making noises about creating something like a Marshall Plan for home foreclosures -- a giant bailout fund similar to one used during previous housing crises. Just for good measure, analyst Bove notes, the administration is engaged in other types of powerful job-creating fiscal stimuli as well, such as ramping up spending on defense, infrastructure and transportation construction. "The administration in power is not going to go into an election year in a recession," he insists.

Continued: Banks must retain investors' confidence

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