Flying Pink Unicorns

The economic recovery began today. The evidence is that credit markets are thawing already, and confidence appears to be restoring in our financial system.

Its rare in history that a turning point is clear while it is happening. But that's the case regarding our economic calamity.

Now I'm not saying the market won't go down more, possibly a lot more. I'm not saying that there aren't big shoes to drop. There could be. There are certainly more little shoes to drop, like banks failing. But its becoming reasonably clear that the huge amount of action taken already, to invest in banks directly, invest in toxic securities, investing in commercial paper (essentially loaning money to companies) and various bailouts, among other things, has been sufficient to turn the corner. The chance of a huge meltdown and depression has plummeted. Its still there, but I think it would take serious policy mistakes for that to happen.

But after real initial reluctance to take decisive action, Paulson has pulled a personal and ideological 180 degree turn, and can't be activist enough. Bernanke lent weight today to another fiscal stimulus, which democrats are proposing on the Hill. And since this one will be on the spending side, rather than mere tax cuts, it is much more likely to actually do some real good.

We're running a ginormous deficit for this fiscal year, really big. That's Keynisanism on steroids. The old man is pumping his fist in his grave.

Now I don't mean that the economy will soon start growing. Most recessions last 9 months or so, and this recession will be worse than usual. So probably more than a year. Assuming it started sometime this Spring, we probably have quite a few months yet. But we've reached a turning point in that the seeds of recovery have been planted, watered and cared for.

Don't get me wrong, the US still has enormous economic problems. The stock market crash (yes, it has been a crash, albeit in slow motion), huge consumer debt levels, tons more foreclosures to come (enough to damage our economy, and not merely be a big hit to a lot of people), states' terrible economies and budgets, a still fragile banking system, and more. But we know how to fix these problems. Disappearing confidence in our financial system is a much bigger, and more dangerous problem. I think we've gone a large chunk of the way to solving that problem, leaving us with the normal problems we have in a recession, together with the accumulated failures of recent years, which is to say too much consumption, too little investment, too much borrowing. Put another way, the huge twin deficits of the late 1980s, the trade and budget deficits. They're back, and in fighting shape. Fixing these will take a long time, and probably sub par growth. Also a weaker dollar. The dollar has weakened quite a bit in recent years, though it has bounced back in recent weeks.

But these problems are very different from those leading to a depression, where economic activity is way below the economy's potential for a long time. I think that has been averted.