Part 2 on the New Economy and Why I Don't Expect a Recession (Quite Rambling)

I was reading in the Wall Street Journal today about how there's a widespread expectation of the financial sector taking a heavy hit. In particular, the number one guy at Bear Stearns just fired the number two guy, their stock has plummeted, and everyone is expecting more bad news there. incorporating their own difficult to believe claims, I sum up Bear Stearns thusly: they made money in June, they made money in July, they will be bankrupt by September.

Reading between the lines however, I take heart that much of the deepest concern seems localized to the financial sector. So far, the overall losses in the stock market have not been large although the volatility has been. There was mention of losses in the consumer sector and of course the housing sector is a disaster; that is what has caused the current problem (Bear Stearns is a Wall Street firm that was especially heavily invested in mortgages.)

However, my optimism remains strong that we will not have a recession at this time. I consider this to be quite striking and notable, if true. No doubt, the complete collapse of the housing sector would have tended to cause a recession in the past. And make no doubt about it, I believe the housing sector will not recover for a decade, maybe three to five decades. I am much more pessimistic about the housing sector than the average analyst, so none of my optimism has to do with expecting "an upturn in the housing market in 2008."

No, the housing market has collapsed, completely and utterly. Now, people must learn that housing prices rise and fall just like the price of every other thing in the world. Is just that the cycle of the housing market prices is much slower than the cycle of prices of practically anything else. Housing prices tend to rise for 50 or 60 years at a time and fall for 50 or 60 years at a time; at least this is the implication of the data for the past one to 120 years (sorry I have no reference).

My optimism, rather is based on the notion that our US economy has become much more segmented in recent years. By this I mean much less integrated. Of course, this is only true in certain ways. In other ways, the economy is no doubt much more integrated.

But the segmentation I refer to focuses on the new ways of packaging debt. Due to these new types of debt packaging, many more players have gotten into the lending market who weren't in it before. Many of these players are smaller players. In some cases they are dumber players and for sure many are losing money and about to lose some more.

This is the result of the collapse of the housing market. However, unlike in the past, when most of the lending was done by the banks, this need not lead to a recession. When most of the lending was done by the banks, that particular segment of our economy would have been getting extremely cautious about now due to some very large losses. This would have caused the recession.

Of course, this is all a very tortured hypothetical. The recent hyper-boom was made possible by the new types of debt-packaging. That means that the new types of debt-packaging actually caused the current problem. This makes sense really. These new players are learning the hard way.

But mainly, what I wanted to say today to add to my previous post on this subject was thoughts about how the Great Depression occurred and what makes a country poor. In the Great Depression, as I understand it, banks stopped lending money and businesses generally could not grow or even continue to operate. This is in a sense, caused by the centralization of capital in banks. Now on the other hand, we have capital being spread out much more. This tends to result in more failures (like the current failure of the housing market) but make each failure less catastrophic.

Another result of the current situation is that it allows people to learn more and learn faster. Yet another result of the current situation is that it gives the smarter and more creative people more of an edge. It seems to me, at least at first glance, that this tends to benefit society by tending to put more resources in areas where there will be greater yield (i.e., someplace new).

Consider the tremendous pressures that so many companies face against raising prices for their customers even though the price of commodities, energy, and other expenses are currently rising rapidly. It seems to me (and I'll admit this could be quite a bit of a stretch) that these kinds of forces may squeeze some capital out of "commodity operations" and thus release some capital for innovative operations.

Commodity operations are operations in which the company does the same thing that other companies do. They hope the prices change in a way that will be favorable to them and they try to do things more efficiently than the other companies. However, is usually difficult to be very profitable in these areas and it seems that lately it is becoming more difficult.

Now look at where the money is flowing. Most obviously, it is flowing to China. How does this fit in with this thesis? It does because in a sense, all operations in China are currently innovative operations. Producing in China is an attempt to take advantage of previously underutilized resources. It is an attempt to seize on an investment opportunity as opposed to simply performing a commodity operation.

How about high-tech? I don't feel overly impressed with what is going on in the high-tech sector at this time. In fact, I feel that this sector was so successful in innovating in the past that it has resulted in innovation being stifled in the present. It seems to me that the idea of innovation in high-tech has become, "let's add video to it," "let's do it wirelessly," "let's increase the capacity/ throughput of the system," etc.

I don't see people doing new things all that much. I'll admit, I may be completely wrong on this one.

Let me give an example. Bluetooth has been an exciting innovation in recent years. it was fairly quickly applied to cell phone headsets because phone company technology has a certain amount of standardization---probably a hangover from the AT&T era.

On the other hand, it took years to see a single audio Bluetooth headset appear, and they still seem to be rare (I may be wrong on that last.) The reason there were no audio Bluetooth headsets for years after there were cell phone Bluetooth headsets is because audio technology is not standardized among companies. It was felt that any audio Bluetooth headset needed to be compatible with the products of all companies and this proved to be very difficult to do, so they simply went years without any products at all. Wouldn't it have made more sense to make products that were only compatible with specific companies as a temporary solution?

I apologize for all the rambling here today. Despite the non-innovativeness of the high-tech sector, I believe there is a lot of innovation in the world today that is creating a lot of wealth and benefiting many people. Admittedly this blog does not have much of an overall point today, but I did make some individual points that I wanted to make.