Reading the news today, it may seem like today’s financial difficulties are unprecedented. Based upon the actions by the Federal Government, there often seems no precedent for many of the recent changes in the regulatory environment.
What is interesting is that, if you look a bit deeper, it seems that what we’re witnessing in the markets follows similar patterns to other structural recessions in the US economy. In part, the growth of modern finance has made the effects of the recent mortgage crisis more widespread while the expansion of modern media has made the public more aware of its implications.
Last year, at the Jackson Hole Economic Symposium, before the full breadth of our current recession were clear, Federal Reserve chief Ben Bernanke spoke about the History of Recessions (see CNBC). Of particular note, Bernanke reflect that “institutional changes in the US housing and mortgage markets have significantly influenced…the economy’s cyclical dynamics…understanding these linkages…(helps) us better cope with the implications of future developments.”
Today, the speech seems as prescient as ever, and recent economic history is rife with lessons. Taking a historical perspective on today’s events, however, reveals that looking back at historical recession patterns can help lend insight into our path to a more stable economic future.
The main lesson that can be traced to every single recession in modern economic history is that uncertainty impairs decision making ability, and that solutions to economic problems come from providing logical, data-driven clarity. President Bush’s speech on Friday, September 20 (see AP), the day the government began to plan a larger assumption of mortgage-related debt drives this point home, “behind all the technical terminology…is a critical human factor: confidence in our financial system…”
Despite the advances in economic modeling, the critical human factor of making emotionally driven investment decisions was a core part of the last two recessions – the 1990-19991 and the 2001 downturn, both of which technically lasted for eight months.
Technical, the NBER (National Bureau of Economic Research) defines a recession as two consecutive quarters of declines in real GDP.As economic researcher Geoffrey Moore of Columbia University notes, “one significant trend is that recession have been getting shorter and expansions longer.” (see EconLib.)
Again, the main lesson here is that with greater access to data and tools that allow us to come to better understand patterns, both companies and consumers are able to make smarter adjustments in today’s environment than ever before.
As a first step, make sure you have all of the data on your personal finances that you need and that this data is sound. Sit down with a financial advisor or accountant if necessary.
Once you have access to all of this data, make sure that you review all of your financial decisions from spending to investment to find where adjustments are necessary. For example, you may want to reduce credit card spending or move to a credit source with a lower interest rate; the adjustments will vary for each person.
Just as Wall Street is forced to revisit their business models, so should all of us in Main Street give the same critical eye to all of our daily spending decisions. Chances are that you can make a series of improvements to put you in a better financial position during the recession and beyond; after all, the goal of financial planning should always be about looking forward to an improved situation in the future.