My Recession?

The stock markets all over the world have been tanking lately (figures they started right after I invested all the cash I had in my IRA).

To combat the downturn, the fed instituted a surprise cut in interest rates by three times the usual amount, while Bush announced a stimulus package. These have had little effect, and I think I know why.

A good response to an economic downturn affects the cause of the downturn. A mediocre response to an economic downturn is something that would help the stock market anyway. We're in the latter situation right now.

The problem isn't taxes or interest rates or a temporary dip in confidence or an overreaction that will be corrected soon (though I think and hope there's a little bit of that last in there). The problem is more fundamental: we know now that things don't work the way we thought they worked, so the market has to adjust. Wall Street created a hugely complex financial system that we never fully understood.

So while there are a few good ideas out there (Nobel laureate Stiglitz proposed expanding unemployment insurance, since not only will it give those hit hardest a cushion, but it will give money to people who are most likely to spend it immediately), most of them are, as Lord Henry put it, like putting band-aids on hemorrhage: if they do work, it won't be for very long and it won't be very well. And I'll throw in that it does nothing to attack the problem.

The problem-solving is unfortunately coming too-little too-late. Alan Greenspan had furiously fought against the notion of increasing regulation of the lending practices that started this mess, and the efforts to do so now are, as Paul Krugman put it, a little like locking the barn after the horse has escaped. Meanwhile our presidential candidates are weighing in with ideas that should be classified as "dumb and dumber" just for the appearance of decisiveness and leadership.

Instead of instant leadership in the application of band-aids, we need long-term leadership and vision. The thing that will return the American economy to greatness is innovation, not interest rate and tax policy. We need incentives to innovate now more than ever; accelerate our development of 21st century technologies that will both increase what economists call "multi-factor productivity" (essentially how much value we can create with a set amount of people and stuff) and that will kick-start entire sectors of our economy (like a huge push for alternative energy sources--a Manhattan Project style think tank with the promise that the US Government will be the first customer of any company that makes it practical and affordable).

Hopefully once our leaders are finished seeming decisive, they'll realize what's doing on an decide something a little more helpful.