How Recesssions End.
Excerpted article from Real Clear Markets last week:
Recessions Are Self-CorrectingJohn Tamny, 03.09.09, 12:01 AM EDT
The government needs to get out of the way for the economy to fix itself.
Banking giant JPMorgan Chase announced Feb. 23 that it would be cutting its quarterly dividend by 87% to a nickel per share. At face level, this sounds bad, but the savings will speed the process by which it repays TARP funds in order to avoid problematic government oversight; plus, the extra capital cushion puts the firm in a better position to make acquisitions of flagging competitors, should difficulties in the banking sector drag on.
The JPMorgan example is important for reminding us that both individuals and companies frequently respond to economic difficulty in ways that ensure recessions are short-lived. To put it simply, when left alone, recessions tend to correct themselves.
Broken down to the individual, there's a fear factor that is part and parcel of downturns. First off, whether employed or unemployed, we save more and our savings very often flow, through bank lending, to capital-starved businesses eager to grow. There are no profits without saving first, and recessions induce us to save.
That, plus downturns make the individual work harder....In helping ourselves, we aid economic growth.....
....While job loss is always unfortunate, it should also be said that, during periods of rising prosperity, a lot of marginal, inefficient or simply mismatched workers are employed by firms that would not have hired them during periods of sluggish growth.....{I}nvestors aren't paying firms to create jobs. Instead, they're committing capital to the very entities deemed most able to produce as much as possible with as few people as possible....
...From the above equation, the results we actually see are the redundancies and the cost cuts, but the longer-term and very positive unseen is that firms are frequently rewarded by investors for doing more with less. Increased investment in profitable firms ultimately leads to more hiring....The very process that leads to job loss within a company leads to future job creation in same.
The government needs to get out of the way for the economy to fix itself.
Banking giant JPMorgan Chase announced Feb. 23 that it would be cutting its quarterly dividend by 87% to a nickel per share. At face level, this sounds bad, but the savings will speed the process by which it repays TARP funds in order to avoid problematic government oversight; plus, the extra capital cushion puts the firm in a better position to make acquisitions of flagging competitors, should difficulties in the banking sector drag on.
The JPMorgan example is important for reminding us that both individuals and companies frequently respond to economic difficulty in ways that ensure recessions are short-lived. To put it simply, when left alone, recessions tend to correct themselves.
Broken down to the individual, there's a fear factor that is part and parcel of downturns. First off, whether employed or unemployed, we save more and our savings very often flow, through bank lending, to capital-starved businesses eager to grow. There are no profits without saving first, and recessions induce us to save.
That, plus downturns make the individual work harder....In helping ourselves, we aid economic growth.....
....While job loss is always unfortunate, it should also be said that, during periods of rising prosperity, a lot of marginal, inefficient or simply mismatched workers are employed by firms that would not have hired them during periods of sluggish growth.....{I}nvestors aren't paying firms to create jobs. Instead, they're committing capital to the very entities deemed most able to produce as much as possible with as few people as possible....
...From the above equation, the results we actually see are the redundancies and the cost cuts, but the longer-term and very positive unseen is that firms are frequently rewarded by investors for doing more with less. Increased investment in profitable firms ultimately leads to more hiring....The very process that leads to job loss within a company leads to future job creation in same.
posted by CR English at 7:57 AM
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