I don't think we ever recovered from the recession of 2001

(Opinion piece. No links or foot-notes. Just someone's sense of things.)

My theory of the 2000's...

Histrically, burstng bubbles wreck economies for years and years, and the internet bubble was (at the time) the biggest and broadest bubble ever. NASDAQ 5000 was as wild as the earlier Japanese stock bubble and in an economy much larger than Japan's. (And as wild as the stock bubble of 1929 that ushered in the great depression.)

The bursting of the internet bubble should have completely wrecked our economy, but for some reason did not.

Or did it?

I would argue that there never was a sound GDP recovery from the mild 2001 recession.

After 2000, financed withdrawals from equity in real-estate, which were a tiny portion of GDP previously, exploded and became about half of GDP for years on end. George W. Bush oversaw an economy with the non-equity-withdrawal components of GDP under 2% year after year. (GDP from equity-withdrawal is legitimate economic activity up to a point, but not as the majority of GDP for extended periods.)

The internet bubble money was not all destroyed. A lot of fantasy money was turned into real money as over-priced stocks were unloaded and, over time, sunk into real estate. Rather than real-estate conferring legitimacy to bubble money, the bubble money turned real-estate into another bubble.

Then everyone jumped on board since we are conditioned to trust real-estate, even when real-estate is behaving like Worldcom.

And with home prices rising in surprising fashion people could make up for the non-recovery by using the house as a piggy-bank to subsidize flat wages and under-employment. (If you are taking some time off because you just refinanced with a $100,000 cash out you are not unemployed. But that doesn't mean there would be a job for you if you were looking. Which you aren't.)

Other factors that prevented the internet bubble from taking down the economy: Massive stimulus and low interest rates.

Bush's tax-cuts and wars were immensely stimulative. That's where the gigantic deficit we inherited came from.

Tax cuts for the rich and pointless wars are not optimally efficient stimulus but stimulus none the less. Building million dollar bombs just blow them up isn't smart stimulus but is comparable to conceptual make-work stimulus like tearing up roads to re-pave them.

Similarly, tax cuts for working people are more efficient stimulus than tax cuts for the rich, but HUGE tax cuts for the rich are definitely stimulative.

And after 9/11 we cut interest rates to assuage financial fear over and above what the fundamentals indicated. (Cutting interest rates in reaction to shocks has been popular since the crash of 1987 when newbie Fed Gov Greenspan appeared to save the world. Since then interest rates have often been used for psychological effect as the Fed came to view itself as ruler-of-all-things.)

Tax cuts, wars, cheap money and everyone taking huge sums from surging home equity... that should have been the biggest run-away boom since forever. A crazy 5% annual GDP for five years straight kind of thing.

Instead it was a fairly stagnant era with little wage pressure and modest inflation.

It is not surprising that the house of cards finally came down in 2008. What's amazing is that it stayed standing for so long.

That one was probably only because of the HELOC spending spree everybody and his dog went on before real estate tanked here in LA.

It was a temporary recovery in 2004, prior to the election.

It lulled us into a false sense of growth and played a huge role in why Bush got reelected.

But then things began falling apart again shortly after the election and led to the crumbling of the economy in 2007 and 2008.

That's a big reason the recession this time around was so bad. We failed to do any type of real recovery after the first recession and just essentially made a few touchups.

Think of the Simpsons episode where a hurricane rips through Springfield. The Flanders' house is ruined. Then everyone in the town gets together to half-ass rebuild it in a night. At first, it looks good. But as Ned is touring the house, he starts seeing signs the job wasn't properly done and they essentially just glossed over much of the troubles.

A hanging nail. A poster acting as support for a load berring wall. Then the hall shrinks to the point of only a few inches.

As Flanders leaves, shutting the door, the whole house collapses behind him.

Well it's basically the same thing. The recession in 2001 was the hurricane and instead of rebuilding the foundation of the house and making everything perfect - they half-assed it. They gave the perception things were fine for political reasons (remember, in the summer of 2004 the economic rebound was supposed to be happening. It lasted all a half-year).

Then everything came crumbling down.

Well now Obama is left standing in the rubble.

--since the Reaganauts took over in'80?

But under Reagan and CLinton there was some decent growth... over shaky foundations, yes, but at least with some job creation and upward mobility.

But I tend to agree with you since both of those booms were plenty bubbly.

Reagan - crash of 1987

Clinton - crash of 2000

In the last decade, the only economy we had was the credit economy. I remember getting into it with a now defunct DU poster, Frodo. I specifically remember telling him that he did not understand the difference between debt and equity.

I'm sure it was. It began in March 2001.

Oh wait...George Bush was the pResident in March 2001. So he was in office for TWO RECESSIONS.

And he created over HALF of the current deficit!

(End of the truth zone) Freepers may now continue on in their imaginary world where Bush II inherited a recession from Clinton.

That was when the free trade rubber band snapped back after the fat cats sucked up the initial profits out of it. Call it what you want, but almost everyone, including the Democrats (even Al Gore), favored abolishing tariffs and allowing domestic manufacturers to set up overseas and start an international race to the bottom (that sucked us all down eventually).

From agriculture, to lumber, to manufacturing, it tore the sectors apart and displaced high paid blue collar workers.

I graduated into a terrible job market in 2002. That last handful of years seemed like a ruse to me, especially being a CompSci grad. Honestly, Ive seen tough times throughout it all, and I think the housing bubble exacerbated the problem, but it was merely a side effect of a recession in the first place.

I use to joke that the economy was dead, and people just didn't know it yet. Of course, plenty of builders got rich during this time.

What bubble are we going to use now to resurrect this cadaver? Any tricks left? At some point, doesn't there need to be a real adjustment (not only economically, but politically)

K&R.

The only "boom" that was going on was defense spending plus real-estate and oil speculation. The job market has definitely never recovered from the dot com bust, but the mortgage boom covered that over for a few years.