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A recession/depression is the process of liquidating malinvestments and redeploying wealth and labor to economically profitable ventures. If what you say were

A recession/depression is the process of liquidating malinvestments and redeploying wealth and labor to economically profitable ventures. If what you say were true, then we wouldn't be suffering from unemployment. We'd suffer from massive writedowns in our wealth (as we realize our malinvestments) but labor would be redeployed to new ventures. Effectively, we'd be working our assess off harder than before, but receiving a lower quality of life in return. In reality, however, the economy is not at full employment. If we malinvested before (effectively did useless work), that should be a sunk cost. We wouldn't receive the future benefits we expected from that work, but that wouldn't preclude us from continuing to work. Malinvestment is not a reason for unemployment. No, we're in a liquidity trap. Option A is monetary policy. That has been tried and exhausted. Option B is fiscal policy. Bring out the helicopters!

kingkongrevenge 18y ago
> If what you say were true, then we wouldn't be suffering from unemployment. Uh, why not? I don't get it. Of course business liquidations and a decline in capital investments produces unemployment.
- jorgeortiz85 18y ago
  It's clear that the massive investments in housing over the last few years won't produce the returns we expected. Yes, we're going to suffer because those were bad investments. But look at the bigger picture. We have productive economic resources (labor), why should they ever be sitting idle? It's not like we don't have problems to solve. We have to pay off our debt to the Chinese. We have to figure out what to do when the oil runs out. We have to make sure we don't destroy the planet sometime during the next century. We need to figure out how to take care of all the baby boomers once they retire. There's LOTS of work we need to be doing, but we're sitting around twiddling our thumbs. That makes no sense.
  - ngvrnd 18y ago
    This presumes someone (the government? you?) can figure out what to do with that labor. Traditionally, in a capitalist economy, we let the market figure that out. Right now, the market's in a bit of a state.
- cchooper 18y ago
  Yes, in the industries where the bad investments where made (finance). But that alone cannot explain the withdrawing of investment from other industries.
  - kingkongrevenge 18y ago
    You don't comprehend the macroeconomic scene if you think we're dealing with a "financial crisis." Dozens of sectors are at over capacity. Debt growth has hit its ceiling and households, governments, and businesses all over the country need to repair balance sheets. This is not about banks or financial firms.
  - potatolicious 18y ago
    No sectors exist in a vacuum. Take this very simplistic example: The original source of our financial crisis is the collapse of subprime mortgages. People are getting kicked out of their homes, which has several effects: - There are now a lot of houses on the market, driving prices down and reducing demand for more construction. Construction companies suffer, as do all of their labour and material suppliers (lumber companies, contract labour companies, etc) - Banks have reacted to the defaults by attempting to protect themselves from further risk, meaning that it's harder than ever to get a mortgage. The effect is a similar drop in housing demand, with similar results as above. - As the true scope of the problem unfolded, people began bailing on bank investments, driving prices down, and eliminating wealth that normal people have stored up in the form of mutual funds and such. This loss of wealth amongst "average people" has driven down consumer demand, and thus basically every other industry out there. - As investors realized that consumer spending will be down, they withdraw their investments in these companies, resulting in further depression of the stock. This in turn causes more loss of wealth for people holding these investments, and causes a vicious cycle. Nothing exists in a vacuum.
    - cchooper 18y ago
      You have proved my point: that misinvestment alone is not the explanation. You also have to look for secondary effects from the financial collapse.
richcollins 18y ago
> but labor would be redeployed to new ventures Labor won't be deployed to new ventures when all of the companies that were involved in the malinvestment aren't allowed to fail.
- natrius 18y ago
  Why not?
  - ngvrnd 18y ago
    He means that if the companies aren't allowed to fail, they'll keep employing the labor that ought to be reallocated.
    - natrius 18y ago
      That's only true if they're continuing to make poor investments. All we know is that lots of companies made poor investments in the past. Letting them fail doesn't change that past, nor does bailing them out necessarily reduce the quality of future investments. If the person I originally replied to is implying that the current bailouts create too much of a moral hazard, then that's a possibility, but that one sentence that was given doesn't do the issue justice.
      - Daniel_Newby 18y ago
        "All we know is that lots of companies made poor investments in the past. Letting them fail doesn't change that past, ..." Those poor investments will wipe out equity owners (and bond holders in many cases) when they are honestly documented on the balance sheet. No rational person will make a new investment until after such honesty develops.
        natrius 18y ago
        Have you seen the share prices lately for the companies that have needed the bailout? Citigroup's stock is down almost 95% since mid-2007. The equity holders have been wiped out. The poor investments don't need to be honestly documented for that to happen. If you know that poor investments have been made, so does the market.
gojomo 18y ago
we wouldn't be suffering from unemployment... labor would be redeployed to new ventures Yes, but redeployment takes time -- especially when everyone looks around and sees all their assumptions about what profits different activities will return are wrong, and need to be recalibrated. That research -- which happens tentatively, experimentally at first -- means some capital/labor sits on the sidelines while the necessary information is collected or created. Redeploying labor immediately at the first things you can think of might keep people busy but can worsen the wealth destruction, if those activities wind up being of net zero or negative benefit. (By tying up workers on make-work, they could also slow the rediscovery and restaffing of valuable projects.)
- parenthesis 18y ago
  redeployment takes time Those who have lost their jobs don't necessarily have the right skills for the more economically productive jobs that hopefully get created. Also, they don't necessarily live in the right places.
  - ricree 18y ago
    Not to mention that many who are in the right place and could profitably use new people are not sure of that fact, so they lack the confidence to bring in as many new people as they might otherwise.
- jorgeortiz85 18y ago
  Which is why fiscal stimulus is temporary. It's necessary while the economy is at less than full employment, but once the economy starts picking up fiscal stimulus should drop off.
  - gojomo 18y ago
    That's the cover story. But how much of the $819 billion in the stimulus bill is set to automatically expire in 2 years, or when the economy reaches certain growth targets? Roughly: none. A lot of the spending won't even get flowing until 2010 or 2011, when the economy may be recovering just fine on its own.
corentin 18y ago
Malinvestment also applies to labor. Workers need to retrain before they can start new productive jobs, and they need capital as well (not easy, since the US are borrowing instead of saving).

kingkongrevenge 18y ago

> If what you say were true, then we wouldn't be suffering from unemployment. Uh, why not? I don't get it. Of course business liquidations and a decline in capital investments produces unemployment.

jorgeortiz85 18y ago
It's clear that the massive investments in housing over the last few years won't produce the returns we expected. Yes, we're going to suffer because those were bad investments. But look at the bigger picture. We have productive economic resources (labor), why should they ever be sitting idle? It's not like we don't have problems to solve. We have to pay off our debt to the Chinese. We have to figure out what to do when the oil runs out. We have to make sure we don't destroy the planet sometime during the next century. We need to figure out how to take care of all the baby boomers once they retire. There's LOTS of work we need to be doing, but we're sitting around twiddling our thumbs. That makes no sense.
- ngvrnd 18y ago
  This presumes someone (the government? you?) can figure out what to do with that labor. Traditionally, in a capitalist economy, we let the market figure that out. Right now, the market's in a bit of a state.
cchooper 18y ago
Yes, in the industries where the bad investments where made (finance). But that alone cannot explain the withdrawing of investment from other industries.
- kingkongrevenge 18y ago
  You don't comprehend the macroeconomic scene if you think we're dealing with a "financial crisis." Dozens of sectors are at over capacity. Debt growth has hit its ceiling and households, governments, and businesses all over the country need to repair balance sheets. This is not about banks or financial firms.
- potatolicious 18y ago
  No sectors exist in a vacuum. Take this very simplistic example: The original source of our financial crisis is the collapse of subprime mortgages. People are getting kicked out of their homes, which has several effects: - There are now a lot of houses on the market, driving prices down and reducing demand for more construction. Construction companies suffer, as do all of their labour and material suppliers (lumber companies, contract labour companies, etc) - Banks have reacted to the defaults by attempting to protect themselves from further risk, meaning that it's harder than ever to get a mortgage. The effect is a similar drop in housing demand, with similar results as above. - As the true scope of the problem unfolded, people began bailing on bank investments, driving prices down, and eliminating wealth that normal people have stored up in the form of mutual funds and such. This loss of wealth amongst "average people" has driven down consumer demand, and thus basically every other industry out there. - As investors realized that consumer spending will be down, they withdraw their investments in these companies, resulting in further depression of the stock. This in turn causes more loss of wealth for people holding these investments, and causes a vicious cycle. Nothing exists in a vacuum.
  - cchooper 18y ago
    You have proved my point: that misinvestment alone is not the explanation. You also have to look for secondary effects from the financial collapse.

richcollins 18y ago

> but labor would be redeployed to new ventures Labor won't be deployed to new ventures when all of the companies that were involved in the malinvestment aren't allowed to fail.

natrius 18y ago
Why not?
- ngvrnd 18y ago
  He means that if the companies aren't allowed to fail, they'll keep employing the labor that ought to be reallocated.
  - natrius 18y ago
    That's only true if they're continuing to make poor investments. All we know is that lots of companies made poor investments in the past. Letting them fail doesn't change that past, nor does bailing them out necessarily reduce the quality of future investments. If the person I originally replied to is implying that the current bailouts create too much of a moral hazard, then that's a possibility, but that one sentence that was given doesn't do the issue justice.
    - Daniel_Newby 18y ago
      "All we know is that lots of companies made poor investments in the past. Letting them fail doesn't change that past, ..." Those poor investments will wipe out equity owners (and bond holders in many cases) when they are honestly documented on the balance sheet. No rational person will make a new investment until after such honesty develops.
      - natrius 18y ago
        Have you seen the share prices lately for the companies that have needed the bailout? Citigroup's stock is down almost 95% since mid-2007. The equity holders have been wiped out. The poor investments don't need to be honestly documented for that to happen. If you know that poor investments have been made, so does the market.

gojomo 18y ago

we wouldn't be suffering from unemployment... labor would be redeployed to new ventures Yes, but redeployment takes time -- especially when everyone looks around and sees all their assumptions about what profits different activities will return are wrong, and need to be recalibrated. That research -- which happens tentatively, experimentally at first -- means some capital/labor sits on the sidelines while the necessary information is collected or created. Redeploying labor immediately at the first things you can think of might keep people busy but can worsen the wealth destruction, if those activities wind up being of net zero or negative benefit. (By tying up workers on make-work, they could also slow the rediscovery and restaffing of valuable projects.)

parenthesis 18y ago
redeployment takes time Those who have lost their jobs don't necessarily have the right skills for the more economically productive jobs that hopefully get created. Also, they don't necessarily live in the right places.
- ricree 18y ago
  Not to mention that many who are in the right place and could profitably use new people are not sure of that fact, so they lack the confidence to bring in as many new people as they might otherwise.
jorgeortiz85 18y ago
Which is why fiscal stimulus is temporary. It's necessary while the economy is at less than full employment, but once the economy starts picking up fiscal stimulus should drop off.
- gojomo 18y ago
  That's the cover story. But how much of the $819 billion in the stimulus bill is set to automatically expire in 2 years, or when the economy reaches certain growth targets? Roughly: none. A lot of the spending won't even get flowing until 2010 or 2011, when the economy may be recovering just fine on its own.

corentin 18y ago

Malinvestment also applies to labor. Workers need to retrain before they can start new productive jobs, and they need capital as well (not easy, since the US are borrowing instead of saving).