My theory is that this recession will be nasty but short. People are losing confidence in the various markets including money itself. The success of the various markets and the usefulness of money are all based upon confidence. But enough general economics. The key difference between this recession and all others is the common use of technology for communications, modeling, and analysis. This is different from every other bust in history including the tech bust. The tech people were using modern technology but the rest of the world were still using fax machines, telephones, and couriered documents. This time people are using email, blackberries, google, along with a host of other tools. Information is moving much faster.
Basically this disaster was caused by a lack of information. People trusted the old ways. What were the rating agencies doing? What is hidden in all these OTC things? What kind of reserves do the companies issuing CDSs have? What exactly was backing the various MBS? These are all questions that we are quickly finding the answers to. People are both able to find this information but are also able to realistically demand this information be quickly made available.
Other key questions that people are now asking are: Where do I find a new source of credit? Where are the best deals? Along with many other financial questions where the answers may not lay with the old school players.
So the key to a functioning market is open information. The existing market became horribly dysfunctional as huge chunks of it were either incomprehensible or hiding in a sea of fog. As people are now demanding ever greater access to timely information the trust in the markets should return as fast as this information becomes available as well as the money rushing to the areas of investment that avail themselves most to the levels of transparency demanded.
In past recessions people might have taken months or years to get these new patterns of business going; this time around it might be one google search and an email away.
There is a catch. It is a famous concept that Generals fight the last war. I suspect that people will look to the past recessions including the great depression to find their answers. It looks like huge public spending on infrastructure will be a cornerstone of the new White House; I suspect that the time involved will be glacial as compared to the speed that could be achieved by simply opening up the information to the investing public. This lack of awareness of the advantages of letting the market in on what is happening is exemplified by the Fed’s refusal to say who has received what. I suspect that the various insiders know exactly who received what but the general public does not. Thus the general public cannot trust the market. Even the insiders might not be completely sure thus squirreling the entire exercise of having an open market.
As a simple example of the openness needed yet probably not forthcoming; companies like GM will insist that as much as possible be hidden during their inevitable bailout. They will argue that the Unions and their competitors would take advantage of the information. But I suspect that the Unions and competitors know every detail anyway. GM will really be trying to avoid embarrassment. I suspect that the management have made such huge blunders, one after another, that even their own employees would be chasing them around the parking lot with pitchforks let alone the tax-paying public. But beyond embarrassment this openness would not hurt anything but the egos of the GM management. If we don’t find out what went wrong, how can we avoid doing this all over again?