Recessions share a few things in common, and not just that they involve broad, deep, and persistent declines in economic activity. Another common feature is that they breed their own recovery. During a recession, businesses and households improve their productivity, with difficult-to-measure contributions to real economic growth that ultimately sparks increasingly generalized risk-taking and confidence in future generalized growth. Stock prices tend to recognize and reward those efforts, and in timely ways that help anticipate recoveries.

As I mentioned earlier this week, the 1990-91 recession has much in common with the latest downturn. How did stock prices do during and after the 1990-91 recession, and what can we learn from that episode?   More 

We can learn lessons from each of our recessions, but the 1990-91 version had some interesting features in common with our latest downturn.

For one thing, the 1990-91 recession followed on the heels of the implosion of the savings and loan industry. A large slice of the U.S. banking industry was emasculated, disrupting the flow of savings into investment. The crisis and its impact on confidence in real estate values and financial investment played an important role in the 1990-91 downturn. We don't have the savings and loan industry today like we had back then, to be sure, but a residential real estate/financing crisis is one of the roots of the 2007-2009 recession, together with a loss of confidence in the banking system and financial markets more generally.     More 

One factor dampening U.S. employment gains during the developing recovery hasn't gained a lot of attention, it seems.  And in turn, it looks like there may be signs that its influence may be on the wane.

Uncertainty tends to raise costs and postpone decisions. In the last year, uncertainty about health-care reform delayed hiring decisions and dampened company commitments to their human resource capital more generally. But we appear to be getting signs in recent days that the stalemate in Washington could be moving on a path toward resolution. Putting aside what is or is not the right way to go about structuring our health-care system, just getting some clarity on this score could help out a lot.
   

Last year, as government firefighters sprayed massive quantities of money at financial institutions threatening the rest of us with calamity, I had a brief talk with my sister Katie. She talked about forestry management, and how forest fires are frequently best left alone, as natural processes promote healthy forests and growth in the long run. They clear out kindling that can lead to the Big One down the road.

In the Financial Times, William White, formerly with the Bank for International Settlements, uses the forestry management example to argue that the successive monetary and fiscal easing after previous financial crises, and the reaction to our latest one, may actually seed bigger future crises.   More 

Today's Wall Street Journal has a front-page article about a very interesting development in our judicial branch. The Journal reports (well) on a decision by a federal district judge, Jed Rakoff, to void a settlement between the SEC and Bank of America BAC. That settlement included a $33 million fine to be paid by the Bank of America regarding the disclosure of payment of bonuses to employees at Merrill Lynch just before its acquisition by Bank of America. The judge found fault with the fact that the same parties harmed by the asserted misconduct--shareholders--were the ones being asked to pay for the damage.  Those who paid the bonuses, and the lawyers who advised them, were left unscathed.   More