What Causes a Deep Recession?
Ken Fisher distinguishes between what triggers recessions (dislocations like regulatory changes) and what makes them deep (accumulated economic excesses). He notes that the U.S. hasn't experienced a traditional business cycle recession in 17 years, which may have allowed significant unrecognized risks and inefficient investments to build up globally.
Summary
Ken Fisher explains that recessions are caused by two distinct mechanisms that are often conflated. The 'trigger' or 'cause' of a recession is typically a dislocation—a significant negative event larger than the economy's growth rate that shifts it from expansion to contraction. The 'depth' of a recession, however, is determined by how many economic excesses, inefficiencies, and problems have accumulated and need to be purged before a solid foundation for the next expansion can be built.
Fisher uses the 2007-2009 financial crisis as a case study. The triggering mechanism was the Financial Accounting Standards Board's mark-to-market accounting requirement for banks' collateralized mortgage obligations, which forced $2 trillion in write-downs. This forced banks to reduce lending dramatically, causing the business cycle recession. He notes that this regulatory change was largely unnoticed when issued and only became significant as banks began restricting credit.
Fisher emphasizes that the trigger mechanism often has little connection to recession depth. Dislocations are frequently surprising and unexpected regulatory or policy changes that most people don't initially recognize as problematic. What determines depth is the accumulation of invisible debts, excess bureaucracy, decayed infrastructure, and unproductive investments made during the expansion phase.
Given that 17 years have passed without a traditional business cycle recession, Fisher expresses concern that significant excesses have built up globally without being fully recognized as risks. He cites unproductive governmental investments in alternative energy in Europe and similar inefficiencies as examples of things that may need significant write-downs in a future recession before healthy expansion can resume.
Key Insights
- Fisher argues that 'cause' and 'deep' are distinct concepts—a recession's trigger (dislocation) often has little connection to how deep the recession becomes, which is determined by accumulated excesses that must be purged.
- The 2007-2009 recession was triggered by mark-to-market accounting requirements issued by the Financial Accounting Standards Board, which forced $2 trillion in bank write-downs and led to negative lending that contracted the economy.
- Fisher contends that triggering dislocations are often surprising and unnoticed initially—the mark-to-market ruling was viewed as minor regulatory change for nearly a year before its true economic impact became apparent.
- Fisher expresses concern that 17 years without a traditional business cycle recession has allowed significant unrecognized excesses to accumulate globally, including unproductive investments that will need to be written down in the next recession.
- Fisher cites unproductive governmental and bureaucratic investments in alternative energy in Europe as examples of accumulated excesses that may not actually be economically productive and could require significant write-downs during a future recession.
Topics
Transcript
[0:05] A regular question is, "What causes deep recessions, and when was the last one we had?" Well, we haven't really had a "technical business cycle" recession for 17 years now. Since 2009. 2007, '08, '09 was a classic business cycle recession. But the issue is what causes it. And that's a different question than what causes it to be deep. "Cause" and "deep" are somewhat different. "Cause" is what triggers you to move from economic expansion [0:36] into business cycle recession. "Deep" is how far do you have to dig to clean up whatever the problems that existed, that you need to build a base, so the economy can start growing again in the next expansion. Now, to try…
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