Should We Call It a Recession?

More key observers are saying the U.S. economy is in recession. What are the implications of the R-word — and what is the import of the Federal Reserve's decision to help bail out the ailing investment bank Bear Stearns?

Copyright © 2008 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

JACKI LYDEN, host:

It's ALL THINGS CONSIDERED from NPR News. I'm Jacki Lyden. Andrea Seabrook is away.

President Bush is more likely to vote for Ralph Nader in the next election than he had taught of the word recession. But this past week a lot of other people were using the word as well, and it's hard to blame them. The economy is looking mighty bad. There have been further signs of consumer retrenchment, a second monthly drop in employment and a financial crisis on Wall Street.

To learn more about it we turn to NPR's global business correspondent Adam Davidson in New York. Adam, welcome.

Adam, I understand that this week for the first time some key figures did go ahead and call it an economic recession. Who's using the R word now?

ADAM DAVIDSON: Probably the single most significant person using the recession word is a Harvard economist named Martin Feldstein. I think you could go up to any economist in America and say, Marty said recession and their heart would sink a little bit. He runs the National Bureau of Economic Research, which is the formal body that determines whether or not we are in a recession.

Now, he did not say that the NBER is officially declaring it a recession so we are not yet ready to put it down in the history books. But more than anybody --more than President Bush or the Treasury secretary or the Fed chairman — this is the guy who decides whether or not we're in a recession and he said we are.

LYDEN: So what can the government do then in the event of a recession?

DAVIDSON: There is a short-term desire on the part of any elected official, particularly in election year. You want to do something, anything, 'cause you don't want to face voters in November and say, well, we didn't do anything.

But in a certain sense for many economic problems, the very best thing that could happen is to let them run their course, and that's the very nature of capitalism. We allow bad decisions, bad actors to be punished, and that's a good thing to have happened. Because it makes sure we learn better, it makes sure people make better decision of the economy for everyone, stays more productive in the future.

LYDEN: Adam, speaking of punishing bad actors, on Friday the Federal Reserve helped arrange a bailout of Bear Stearns, one of Wall Street's biggest firms. What's going on with that this week?

DAVIDSON: This had a big impact right away because there really is a psychological problem. If you think about the old movie "It's a Wonderful Life," an old-fashioned bank run is a psychological condition. Investors and shareholders and others just start feeling panicky that their money is not safe. And so they sell or they withdraw their money.

And that's what was happening with Bear Stearns on Friday. So what the Fed did is said don't worry. These really big banking institutions are too big for us to let them fail. We are not going to let that happen. And that reassured investors.

The problem is Bear Stearns made some really bad decisions. I mean, they played a bigger role than anyone else in getting us into this subprime crisis. They have their fingerprints on every ounce of this problem, and we're basically preventing them, at least in the short run, from being punished for those bad decisions.

That's what you want in the long-term. The problem is in the short-term, you don't want the economy to go into severe crisis. And so the Fed balanced those two things and said at least for the short term, we are going to help Bear Stearns out.

Now, their plans so far only helps them out for four weeks. Bear Stearns will still have to face the punishment of their bad decisions. But at least for now Bear Stearns is safe.

LYDEN: The economy has been through several cycles of recession in the last several decades. Is there anything positive about recessions?

DAVIDSON: There actually is a lot that's positive about a recession. It is a healthy part of an economy. You know, some people talk about it like a forest fire. It gets rid of all the underbrush, it cleans things up, it allows new companies to come forward.

The fear is that it will spread beyond that king of healthy cleansing level and start punishing and destroying good businesses.

LYDEN: NPR's Adam Davidson speaking to us from New York. Thanks very much.

DAVIDSON: Thank you, Jacki.

Copyright © 2008 NPR. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to NPR. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

Support comes from: