Can an economist explain to me....

[ajhaveri]

The point I'm wanting to make is, if my thinking is right, a recession is the slowing of cash flow from the consumer, which in turn causes business' and corporations to slow down and start laying people off, closing jobs, hell even some going out of business all together. The reason that people stop spending is caused mostly out of fear of an unclear future or economic environment. Meaning if they are being advised or they hear from each other, the new, past treasury officials that a recession is coming, what do they do? they stop spending the money that they had been spending before.....then what happens...you get a recession......

Technically speaking, a recession two consecutive quarters of contracting GDP. We aren't there under those specific terms, but the economy continues to deteriorate because of the credit crisis. What you are referring to is a "crisis of confidence," which leads to a negative downward spiral. The economy may be just fine, but because I think my job isn't secure, or because I simply can't pay my bills, I reduce my expenditures on consumer goods (things I don't need). A scenario like this results in a drop in GDP and is hence merely a "crisis of confidence"

What we are facing right now however, i.e. the credit crunch, is much more severe. Banks and Investment banks made reckless loans to individuals, made private equity deals that were simply insane, and are now suffering for it. Something like 130,000 jobs have already been shed in the financial sector and more are on their way. If you look at the balance sheet of banks, are simply a mess - its a question of potential insolvency - which is why the Federal Reserve has been taken actions literally not seen in Great Depression in the 1930's. It's bad and its getting worse. Losses of more than $1 trillion dollars are expected (note that's was something like $200 billion just a year ago) from poor lending standards.

I will stop here for now - but this is quite literally a mess, a big mess that is going to have broad economic fallout, and will ultimately be worse than than the dot-com lead recession. CFO Magazine's survey said its participants don't expect things to start getting better until the end of 2009, and housing prices are still declining. Home Equity Lines of Credit are being reduced (so consumers can't use them as ATM machines), and commercial real estate loan defaults are on the horizon. In addition, what do you think the declining home prices have on local government? Lower property values ==> lower property tax ==> a small revenue base ==> budget shortfalls. And if they can't raise money in the public markets, then that leads to budget cuts and further job loss.

And on top of the mess, you have the Government giving more power to the Federal Reserve Bank (a PRIVATE bank that is unconstitutional) and the main cause of the current mess and gasp, the Great Depression. Interesting times.

[Jeffers90]

Originally Posted by ajhaveri

What we are facing right now however, i.e. the credit crunch, is much more severe. Banks and Investment banks made reckless loans to individuals, made private equity deals that were simply insane, and are now suffering for it.

Too true. And it's also down to the individuals in the general populous too (see here). We've all been far too busy racking up debts & getting mortgages that are too big to notice the growing problems. It's only now that it's too late for many that we are actuallt 'seeing' the credit crunch.

[thegamerslink]

I do have to say in my defense...not very long after I started this thread, several financial shows that air on the weekends spent a lot of time discussing exactly what this topic is about. And there were more in closer agreement to me on the matter. I mean, I understand the true definition of a recession but morale of a society as a whole if it can be effected can be sent further into something that is either already coming or something that has began. Given the correct direction and morale setting I think financial things like this can be over come. The opposing party can't afford to have that happen though because the economy is what they want to run on since they have no hope winning on national defense under any circumstances.....if they allowed the economy to become more stable or prosperous then they wouldn't have that either....Look at what Nancy Pelosi did with the trade agreement with Columbia, that's even after the Whitehouse gave her concessions to changes she said if made would win her support.....

[Sean@WMS]

Originally Posted by thegamerslink

Someone with a real knowledge of economy, can you explain to me, in laymen terms what the real definition of a recession is?
The way that I always understood it, and correct me if I'm completely off is a recession was caused mostly by the slowing of money flow?

Technically, most economists define a "recession" as three quarters of slow to no growth in the overall economy . . . but how one defines that growth is much more of a gray area.

Slowing of the flow of money is an important factor, but still only one of many.

There are other issues such as investor confidence, consumer confidence ( which can't simply be reduced to cash-flow issues in household economies ), inflation, other upward price forces, etc.

[thegamerslink]

You hit on the key issue of my point, confidence....when you weaken the consumer and or investor confidence then you are enhancing the problem. People talking isn't the only thing it takes but it does add a good bit to the equation. If you have trusted financial people on tv talking about how weak the mark is, you have senators and congressman talking about how we are in a recession, or presidential candidates.

When you take a problem caused by banks and financial institutions being not the brightest bulbs on the Christmas tree and mix that with the avg persons unending desire to live outside their means and keep up with the Jones's and then you add to that an election year when all the candidates are conveying how hard the economic plite of the nation is mixed with an opossing party doing anything and everything it takes to convince the people that the economy is horrible and the reason it's horrible is because of the sitting party. Then you have the supreme formula for a dead stop in economic growth. Mix that with increased fuel prices caused by more than likely a higher demand than what our current refineries are capable to keep up with within a safe level....don't get me wrong that's not the only reason but it is part of the reason....any way you get my drift what I'm trying to say. I'm not being a conspiracy theorist or an advocate for a certain political party just stating the fact that if you scream fire long and loud enough some people are going to start running even when they're totally sure there isn't one, let a couple start running and before you know it you have a stampede for the exits....

[Sean@WMS]

Originally Posted by thegamerslink

So it would be safe to say, that in the off chance that some people, such as, I don't know let's say Democrats for instance want to make a sitting administration look bad, or tilt things in a way they can take advantage of, they all get together and start talking about recession this recession that, the recession is coming and it's coming soon, your going to be facing a recession, your neighbors and friends are having a hard financial times......would that not actually start and/or progress a recession into happening??

I think there is a dimond in the ruff here, despite the tone of this post . . . the market is probably more driven by emotion than reason -- from Main Street to Wall Street.

Wall Street will be much more rational, as they know what their numbers mean ( most of the time ) -- at least a LOT more than folks on Main Street do . . . . but Wall Street is definitely prone to a "herd mentality" and a fair amount of emotion ( best captured, I think, by Greenspan's phrase "irrational exhuberence" ).

On Main Street, most folks just don't understand anything about economics let alone how politics interfaces with their household economy, really. I mean, folks are busy working, raising kids, planning their next vacation, trying to figure our how to make ends meat, etc.

So, to rephrase the question, is it possible to "talk" the economy into a recession? Possible, I guess, but highly unlikely. While there is lot of emotion in the economy, there's a HELLUVALOT more to it than that . . . . for example, people complain endlessly now about the price of gasoline, but they really haven't done a damned thing about it . . . they MAY consume a gallon or two less a week, but overall the demand side of the curve is still on the rise -- even if slowed a tiny bit.

Does the DNC want to take political advantage of the fact that most Americans are getting squeezed financially? OF COURSE! Why wouldn't they? Have they CAUSED a recession by talking about it? Please! People are just way more complex than to be reduced to that.

[Sean@WMS]

Folks interested in this thread might also be interested in this related thread:
http://www.v7n.com/forums/politics/8...tml#post836369

This thread offers a poll and aks for feedback from business owners about how the slow-down in the American economy is or is not affecting their business or the businesses of their clients.