Non-Lessons Not Learned

The Great Recession began, according to the National Bureau of Economic Research, on December 1, 2007. But it didn’t become Great until September 15, 2008. That’s the day Lehman Brothers filed for bankruptcy and when what might have been a garden variety slowdown became an all-out panic on Wall Lehman HQ David Shankbone Street.

Now that the GR seems to be abating, and on the occasion of the first anniversary of the meltdown, journalists, pundits, and even bloggers have spent a lot of time lately summarizing the lessons we have learned from the experience.

Phillip Moeller at US News & World Report gave us 6 Money Lessons of the Great Recession. The first is that "the experts are often wrong." Apparently many used to think that the term expert meant an omniscient seer of the future. Moeller also tells us that "everything is negotiable."

The problem with lessons like these is not that they are not true, but that they have always been fairly obviously true. If people didn’t catch on before, what makes us think they will now? It would be nice to think that the GR has caused a wave of enlightenment, but there isn’t a lot of evidence of that. People are very forgiving of their experts, and even if they aren’t, they just tend to switch gurus rather than start to think for themselves.

Another of the six is "don’t bank on housing wealth."  That’s a pretty commonly cited lesson. It appears in a slightly different form as "house prices do fall" in Seven Lessons from the Financial Meltdown at MSNBC.

As obvious as it is, this one may actually be a legitimate change in consumer attitudes. At least for a while. What is remarkable is how widespread the lunatic idea that house prices only go up had become in the years before 2007. To be fair, not very many people actually stood up and said out loud that house prices never go down. But just about everybody acted and gave advice as if this was true.

If you were kind and didn’t know any better, you might forgive those people on the grounds that house prices hadn’t gone down before and it’s unfair to blame somebody for not anticipating something so novel. But the idea that houses, of all things, were the Magic Asset that never loses value ought to have been transparently ridiculous.

Moreover, the Case-Shiller 10 City Composite of house prices did go down 5.66% between October 1989 and February 1991. (And it didn’t regain its 1989 high until January 1998, meaning that in inflation-adjusted terms it lost more ground.) That may not be as significant or as upsetting as what we’ve just been through, but it ought to have cleanly exploded any fantasy that houses were the perfect investment. And it’s not like we are talking about something that happened long ago to our grandparents. All middle aged Americans in 2006 ought to have been able to remember a time when house prices went down.

And then there is the common assertion that the GR has brought on a permanent change in consumer attitudes. As the AP tells us, Frugality is the New Normal, by Necessity. Evidence for this seems to be limited to the facts  that a) people are currently spending less and b) they tell pollsters that they expect to spend less from now on, even if things improve. The first of those things is certainly true in all recessions, and probably the second as well. But the New Normal crowd insists that, as the AP article cluelessly states without a shred of irony, "This time it’s different."

I am very doubtful that when the Great Recession becomes a mere memory we will be any wiser or, in practice, any different than we have always been. There will be small changes. The list of the top ten financial firms will have some new names. No doc mortgages probably won’t reappear in our lifetimes. And there will be fewer GM and Chrysler dealers than there were pre-GR. But mostly we are on track to be the same bunch of fools doing the same bunch of foolish things.

I do have some ideas about lessons would ought to, but won’t, learn from the Great Recession. More on that on Monday.

[Photo: David Shankbone. (It's the old Lehman HQ in case you can't tell.)]

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