Have we solved the mystery of the business cycle yet? It may be tempting to answer “yes” after tomorrow’s release of the Financial Crisis Inquiry Commission’s final report on the causes that gave us the financial and economic crisis of 2008.
Weighing in at nearly 600 pages, the report will have lots of finger pointing on what went wrong. Much of what will be discussed is sure to hit home in terms of mistakes. From failures of markets to ill-conceived regulations, there’s plenty of blame to go around. That implies that progress is coming. After all, if the mistakes are clear for all to see, there’s no reason to keep banging our heads against the wall. Sounds good, but there’s just one small problem: we’re talking of economics and finance, and therein lies the problem.
No one confuses money and the dismal science with aerospace engineering or plumbing. Obvious fixes aren’t all they’re cracked up to be in economics. That doesn’t mean we shouldn’t try to learn from the past. But expecting real progress that solves the problem of macro volatility once and for all is expecting too much.
“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” according to the report, as cited by The New York Times, which obtained an advance copy. “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.”
Of course, you could say that was true of every financial and economic crisis in history, of which there are many. Tomorrow’s report surely deserves careful analysis in an effort to right the wrongs. But the one thing this report won’t do—can’t do—is tell us how to avoid the next recession. Here’s a prediction: There will be a new recession. Probably not this year, or even next. But another downturn is coming. Timing is always unknown, as is the depth and duration. But it’s coming.
The business cycle is a resilient beast, and it keeps biting. That doesn’t deter economists, who endeavor to figure out why economies stumble. New studies are written, innovative theories are proposed, and armies of researchers slice and dice the data with great precision, focusing the collective intellect on solving one of society’s greatest challenges. It’s easy to see this as a quixotic pursuit. The recessions keep coming, and there’s no reason to expect the future will be any different.
What nefarious forces conspire to keep recessions alive and kicking on an irregular but otherwise recurring basis? The post mortems usually turn up lots of insight, creating the raw material for thinking that the enigma of the business cycle has finally been exposed. The trouble started here, migrated over there, and before you knew it—wham! The boom turned to bust. It’s always clear what should have been done to prevent the last downturn. But they keep coming anyway. Is that evidence that economics has failed? Or is the political will simply lacking to apply the lessons that economists have discovered? Or maybe human nature is such that it’s beyond our capacity for making tough choices today in exchange for sidestepping problems tomorrow? Are recessions simply inevitable?
There are lots of theories, but there’s only partial confidence that any one understands the full, unvarnished truth. Skepticism that greets the diagnosis du jour surely is well founded. Economists have been advancing theories on why economies rise and fall for as long as there have been economists. But the track record is littered with abandoned notions, some of which age with no more dignity than a list of political promises.
Will this time (or more properly, next time) be any different? Don’t count on it. A more reasonable expectation is that we’ll learn how not to exacerbate recessions by turning garden variety downturns into macro catastrophes. Many thought that lesson had been learned after the 1930s. Apparently not. The best laid plans of mice and men, policy analysts and economists.
If the past is any guide to the future on such matters, what we do know is that the stock market is likely to peak ahead of the official start of the next recession. That was certainly true the last time around. We may also see short rates rise above long rates. The so-called inversion of the yield curve has a history of preceding recessions. There are some other warning signs as well.
But perhaps the main thing we know about the business cycle is that it’s a hardy perennial, and nothing in tomorrow’s report from the Financial Crisis Inquiry Commission will change that sobering fact.