We tend to look at our economy as a diversion from the norm after a record financial set back. But the economy we are in may well be closer to the norm.
The former economy was distorted by government policies that incentivized more money to go into housing than would have likely happened in a freer market. Banks were incentivized into putting large amounts of capital into securities that were not as secure as they were promised.
That is not to say that booms and busts are all the fault of government policies. Free markets do not totally counter the extremes of greed and fear; they just flush them out quicker.
Government policies want to protect us from the pain of adjustment to normal, but these policies only serve to make the recovery take longer, or worse, they avoid the recognition and correction of the extremes that caused the crash, ensuring a bigger crisis later.
This last crash was largely due to the failure to fully address the failure of Continental Illinois, Long Term Capital, and Enron. By blaming the greed of a few individuals we neglected to address systemic failures and regulatory shortcomings.
The prior market was one where the lessons of transparency and disclosure learned after the Great Depression were ignored. The ability of a home owner to afford a house was ignored in deference to the ‘social justice’ of promoting home ownership.
We now insist on down payments that put some of the owner’s skin in the game. By being forced to seek growth that can be sustained by realistic cash flow, growth will be more sustainable.
Companies are now forced to control expenses, improve margins, and make a wiser and more realistic assessment of risk. This is what used to be considered normal. It only seems difficult and painful after a period of easy money, distorted incentives and unsustainable policies.
We are in a period of deleveraging. It will be painful and some sectors will be hurt more than others. The more the government tries to protect us from the pain of adjustment, the longer the adjustment will take, the longer unemployment will remain high, and the higher the deficit will grow.
Smaller businesses will suffer more, leaving less competition to the larger companies. Larger companies will do better, income discrepancies will grow and the tax burden will become less progressive. This is the opposite of what one would expect from a president that wants to share the wealth.
This is the result of legislating so much drastic change that economic and business decisions are frozen in the headlights of uncertainty. Adding such uncertainty to the pain of deleveraging will cause this economy to stagnate for years.
The longer the economy stagnates under the burdens of higher taxes and more regulations, the more that stagnation will become the new norm like it is already in Europe. The potential for long term damage to our economic system is significant.