The Real Recession

Fiscal and monetary authorities have already declared that the recession is over. The more important question is recession of what? Is it the recession in GDP, employment, exports or any other conventional metric? If so, such heart warming news may not mean much. The real recession is happening in two fronts – confidence and creativity – neither of which shows up in the accounting numbers.

The recession in confidence was ushered in by fraud and incompetence in the financial system. These are the same people who the US taxpayers are paying dearly to bail-out. It is the same people who want to pay the “money” back – the money they got through the front door but not the back door. It is the same people – some of whom are enjoying accommodations in federal penitentiaries. The recession in the confidence in the financial system cannot be relieved by academics driving interest rates to zero and demonstrating that the economy can grow by financial intermediation if not by any real products. The recession in creativity is helped by the lack of capital or the high cost of capital supporting innovation and new ideas. Capital, allocated by incompetent intermediaries either has stayed in treasury bills or in mattresses – some fearing the end of the world and others, the end of capitalism.

The confidence in the financial system can only return after the complete failure and removal of incompetent and fraudulent firms that control the process. The creativity can improve only when capital can flow to ideas at appropriate cost – not by traditionalists but by those who understand innovation. It is the recession in confidence and creativity that is holding us back. Bureaucrats and academics pouring over numbers of GDP, employment and money supply are simply missing the big picture.