Author Topic: V Shaped recessions vs L shaped recessions  (Read 1981 times)

Offline Dan

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V Shaped recessions vs L shaped recessions
« on: October 14, 2011, 07:19:40 AM »
I hope I am not getting too basic here but I want to get some terminology down before we start lengthy discussions on the economy.
 
A V shaped recession is a cyclical downturn. It is largely a crisis of confidence. As such, this is where Keynsians say you can take out the deepest part of the dip with government intervention.
 
A L shaped recession is a downturn resulting from a fundamental change in the economy. Such as the current recession. When securitizations stopped being a viable secondary market for mortgages, then millions of borrowers could either no longer get a loan or could no longer get the type or size of loan that they needed. This had the effect of taking out a significant part of housing demand and resulted in a horrible oversupply issue with residential real estate accross the country.
 
And when you consider how much of our consumption driven economy was based upon spending more than we actually earned, you can see how shutting off such a large ATM machine for the American consumer would significantly alter spending patterns.
 
And this difference between a cyclical downturn (V Shaped) and a fundamental change (L Shaped) is why I say Obama's entire stimulus program was doomed from the start. I am not opposing him on purely ideological grounds. I am saying Obama did not use the right tool for the job. Keynsian intervention was never intended to help with a fundamental shift in an economy such as a massive reduction in demand for residential housing or a massive contraction in access to consumer debt. It simply was never an appropriate response for the problems we were facing.
If you believe big government is the solution then you are a liberal. If you believe big government is the problem then you are a conservative.

Online walkstall

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Re: V Shaped recessions vs L shaped recessions
« Reply #1 on: October 14, 2011, 07:52:18 AM »
In the L shaped recession, as I have no bills.  IF you give me moneys all I will do is put 90+% of it away.until others pay down or off there bills.
A politician thinks of the next election. A statesman, of the next generation.- James Freeman Clarke

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Offline Dan

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Re: V Shaped recessions vs L shaped recessions
« Reply #2 on: October 14, 2011, 07:59:06 AM »
It's worse than that. Our economy does not have the same capacity it had before. When we took out a big chunk of our secondary market for residential loans (ie securitizations) we took out a big chunk of our capacity to consume at pre 2008 levels. In effect, there is a new normal because consumers have access to less cash. All the stimulus does is kick the can down the road a year or two at a huge cost without altering the root problem.
If you believe big government is the solution then you are a liberal. If you believe big government is the problem then you are a conservative.

 

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