The Great Repression
Amid contending descriptions of the prevailing economic crisis, and candidates for causes and responses, I nominate The Great Repression and, in doing so, point out how unconscious exclusion of painful realities from the conscious mind caused the crisis and continues to infect policy responses to it.
No consensus appears on what to call the prevailing economic crisis, let alone diagnostics of its causes or prescriptions for cure. It’s not yet so severe to warrant Great Depression II or so mild to be called a mere recession. As something in between, some are tempted to call it a Great Recession.
People seem agreed that an asset price bubble, especially in housing, manifested crisis, but disagree on exact culprits. Consumers and businesses respond by curtailing borrowing and spending, but government’s responses are exactly the opposite.
All candidates for culprits ultimately involve false stories that people—citizens, business people, regulators and politicians alike—told themselves. Exemplars: the American dream of home ownership can be made available to all; housing prices tend inexorably upward; massive current borrowing can be repaid from future assumed prosperity; financial risk can be diversified, hedged, securitized away by carving up underlying financial instruments; regulators can let market participants self-monitor and self-correct; and politicians can safely respond to citizen appetites by sustaining all these false beliefs.
Yet these conscious beliefs unconsciously excluded painful truths—the essence of psychological repression. Not everyone can afford or handle burdens of home ownership; housing prices fluctuate according to supply and demand; excessive borrowing is dangerous; financial risk is real and pervasive and cannot be eliminated; markets, like people, including regulators, are imperfect; and politicians act in their short-term self interest in ways that can hurt constituents, not help them.
Equally repressed—excluded from the conscious mind—were recurring examples of similar asset bubbles that eventually burst, including as recently as early 2000’s tech bubble and dating to famous bubbles across the past five centuries.
Asset bubbles are akin to a massive social party of joyous and giddy dimensions. In those times of collective unconscious exclusion of painful memories and realties, party poopers are scarce. Few want to upset the gaiety of frothy markets that suggest flourishing abundance—for nearly all—and runaway riches for the super elite.
The result of the recent repression was a set of pro-cyclical proclivities. Virtually all systemic forces conspired to sustain and reinforce a multi-year boom in housing and financial prices, above what underlying economic attributes warrant.
Repression in economic matters may not always lead to doom. But the scale of unconscious denial of the past five years amounts to a Great Repression. That is the widespread and sustained, if unconscious, denial of economic reality on a scale sufficient so that eventual reckoning spells equally widespread and sustained financial devastation—of which we should now be collectively acutely conscious.
Trouble is, the temptation appears strong to continue to repress rather than to confront. After all, while people seem eager to reduce debt and spending and reset the economy, government’s plan, under the prior and current President, is to respond to the excesses with more excesses, especially massive borrowing and spending.
Perhaps the most acute example of continuing to ignore rather than accept painful realities appears in what Congress did last week on accounting. Traditionally, US accounting standards measured assets at the lower of their original cost or current value, a reliable and conservative way to represent economic exchange. Gradually, in the past few decades, these standards were amended to measure many assets at their prevailing prices, argued as a more relevant way to represent economic reality.
During the recent boom’s run up in market asset prices, those reporting transactions using accounting standards loved the chance to report at prevailing prices, as it made their financial positions look better. They championed this so-called fair value accounting. Now that asset prices have reversed dramatically, they complain that it is misleading to measure assets at prevailing prices. Instead, they want to measure them at imagined prices that would prevail if the current economic downturn were not a reality.
Last week, proponents of this repression accounting got their way. They persuaded Congress to use its political will to meddle in the traditionally professional and independent business of setting accounting standards. Setting accounting standards is usually the province of the Financial Accounting Standards Board (FASB), an independent expert body set up to be outside the reach of Congressional influence, precisely to insulate it from the latter’s political passions.
But now Congress has pressured FASB into letting assets be reported not according to prevailing economic realities but according to what they would be worth if the economy were growing and asset prices stable or rising. In short, Congress has prescribed repression as a solution to repression. They wish to sustain, not confront, The Great Repression.
Hat Tip: Stephanie Cuba