Economics and Change

In hindsight, I'm surprised it took me so long to write a post devoted so significantly to economics, for two reasons. The first is simple: I love economics. It's one of my favorite subjects, and I find it absolutely fascinating. The second reason is that it relates so clearly to the topic of this blog. Economics is, at its core, a psychology game, riddled with people who are affected by changes and make decisions based on those changes that, when aggregated, have a significant effect on the flow of money, which, in turn, results in changes in the way people live. It's really a remarkable subject area, and tonight's blog will be about a time when the entire economy changed: September 2008.

In the months prior to the financial crisis of 2008, the United States economy was already in a slump. Following the bursting of the United States housing bubble, unemployment was up, the market was somewhat down, and the value of many securities fell dramatically. The economy was in a recession. However, this recession didn't reach crisis levels until the collapse of Lehman Brothers in September 2008. Suddenly, the fourth-largest bank in the country was wiped out by this crisis, the perceived risk in these complex securities came into even more question, and the faith in the financial markets dropped significantly almost overnight.

Most of us have probably heard that story, but what really fascinates me is the data. Several data series are able to show us the lingering effects of that crisis. One of the most significant, in my opinion, is the M1 Money Multiplier. This multiplier essentially measures the willingness and ability of the financial markets to loan out money.

On the graph, it's pretty clear where Lehman Brothers collapsed (where the sharp decrease in the multiplier is), but what's really interesting is the stuff that comes after it. Since the financial crisis, almost six years have passed. The economy has, to a significant degree, recovered. The stock market is reaching record highs, initial jobless claims have decreased, and the Fed is tapering off QE. And yet, the banks are still not loaning money at the levels they were willing to before.

That's a classic story of being burned by a massive change and reacting to it logically. It is absolutely logical for the financial institutions to be more conservative with their lending practices, and it may not be a bad thing. However, there is no doubt that this reaction to the change, while logical, also has a net negative effect on the economy. The financial markets are the oil for the economy to run on, and the decreased lending has greatly reduced the ability of the economy to grow out of this recession and slow recovery. The reaction to the massive changes brought about by the financial crisis may be logical, but they're also negative to the economy as a whole, and that is a problem that deserves much more attention.