Wouldn’t it be nice to get back to the way things used to be? Faced with unfortunate events, that response is understandable (if not particularly practical). That kind of wishful thinking was behind the financial markets’ exuberant but short-lived rebound in the spring.
Back on March 10, the CEO of Citibank revealed the then-astounding news that his company would actually make a profit in the first quarter. On reflection, this shouldn’t have been too surprising — after all, his bank, with other U.S. financial institutions, is the recipient of $1-trillion in no-risk government handouts. That’ll help the bottom line any day.
Nevertheless, after months of doom and gloom, the prospect that banks could make big bucks again set markets on fire. And that sparked a cycle of self-fulfilling optimism that, for a while, heralded a return of the magnificent bull market that preceded the crash of 2008. The Toronto Stock Exchange rose 35 per cent in three months; other bourses rose even faster. Commodities, hedge funds and currencies went along for the ride.
Imagine making a 35-per-cent profit in three months, just by correctly timing the market’s bottom. That sure beats working for a living. Brokers dared to dream again of bonuses and BMWs. Forget hard lessons learned the last time we tried fuelling economic growth on a tank of financial exuberance. Let the good times roll.
Of course, there’s a lot more to economic recovery than bank profits. And the collective optimism of financial investors can’t do the trick, either — unless and until there’s something real to underpin it. Economic recovery actually requires getting people working again and producing stuff. And on that score we’re still going backward, not recovering.
Just when happy days seemed here again, the party-poopers at the U.S. Department of Labour marched in and took away the punch bowl. Its latest employment report showed the U.S. is still losing jobs at an awesome pace: almost half a million a month. Canada’s jobs numbers, released on Friday, were not much better. We lost 48,000 full-time jobs in June, only partly offset by new part-time work and self-employment.
The appropriate response to a collapsed financial bubble is not to sit back, cross our fingers and hope it reinflates. We must ask deeper questions about the basis for economic growth. Aggressive leveraging and wanton credit creation can generate quick profits for some. If properly managed, leveraging and credit can also facilitate real economic progress for us all — but only if funds are channelled into productive investments (not paper schemes), and debt loads don’t get out of control.
But that kind of prudence was all forgotten on Bay Street this spring. Smarting from last year’s massive losses, and itching to do something with idle cash, the speculators jumped in with both feet. For a while, mass psychology itself can power markets upward. It’s like Wile E. Coyote, who runs off a cliff, yet stays suspended in mid-air; only when he looks down and realizes nothing’s holding him up does he plunge to the canyon floor. Brutal job numbers, along with other indications that real recovery is still months, if not years, away have now caused the markets to look down.
In the wake of this renewed pessimism, some pundits now predict a “double dip” recession. But this metaphor isn’t quite valid — because in the real economy (as opposed to the paper one), the first recession wasn’t remotely over. Only in a self-contained financial casino, with no windows looking out at the real world, could anyone possibly believe recovery had already arrived.
And hence it’s only the financial sector that will suffer a double dip. Indeed, anyone who piled back into the markets this spring, blinded by contagious greed but without reflecting on the pain and hardship that still mark the real economy, deserves the double-dip losses they are now poised to incur.
It’ll take real spending on real goods and services to put real people back to work and end this recession. A reinflated financial bubble can’t do that. So let’s put more emphasis on putting money into motion in the real economy (like actually building new infrastructure projects, and actually allowing unemployed people to collect EI), instead of waiting for another mood swing from the same people who got us into this mess.
Jim Stanford is an economist with the CAW.
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