“Conventional wisdom” was wrong
Guest post by Vedran Vuk of Casey Research
The current economic crisis has turned a lot of common wisdom about recessions on its head. Hence, I wanted to make a short list of these ideas. Despite the ideas' faults, many are still followed to the detriment of those who follow them. I know that I won't be able to list everything; so if you have some more points to add to the list, please send them over.
1. Hide from a recession in school - Unless one is getting a doctorate, this strategy has completely failed. Anyone entering a Master's degree in 2008 or 2009 should be done with the degree by now. Unfortunately, in the meantime, the employment situation has not improved.
In some ways, the situation for the students could actually be worse than prior to acquiring the degree. These students are now unemployed with huge loans. If this recession continues into 2012 and 2013, even the PhDs will lose on this strategy.
2. Don't hire overqualified workers - This is pretty standard recession advice for companies. Sure, the overqualified person might be great for the job and a good deal for the moment, but as soon as the economy recovers, the employee will leave the company. And the company is left holding the bag without an employee in a more competitive job market. It's a bad deal.
However, in this recession, the companies that hired overqualified workers scored big. The job market hasn't recovered at all. Furthermore, it takes unemployed workers about six months on average to find a job. If one hires an overqualified employee, they likely wouldn't be able to locate a better job searching part-time for a whole year or more. This has been a great time to get some amazing workers on the cheap.
3. Bet on the next boom - Many investors had a textbook version of a recession in their mind. There's a crash followed by yet another roaring boom. Sure, stocks recovered from their lows, but there's no raging boom taking place now. A bunch of folks are holding bank stocks ready for a leveraged play on the economy, but the banks are doing nothing but collecting dust.
This view has kept many investors away from gold as they still believe in an oversimplified version of the business cycle. As soon as the economy recovers, supposedly gold should collapse. Well, where's that recovery?
4. Fiscal and monetary stimulus creates jobs - In my opinion, never has the United States government spent so much money and created so few jobs. The stimulus didn't even put a dent in the unemployment rate, and even the president has admitted that those shovel-ready jobs weren't so shovel-ready after all. Some have called this crisis the failure of capitalism, but with these sorts of results, big government abysmally failed even more so.
5. The effects of monetary policy are relatively quick - Admittedly, this took many free-market types by surprise. The Fed printed tons of money, and it has taken inflation nearly three years to show its ugly face. Many were expecting hyperinflation as early as 2008. Even the textbooks cited two years as the time frame for monetary policy to filter through to the economy. In this case, it's taking much longer.
6. Wait out the real estate market - This one is pretty self-explanatory. No, house prices don't always go higher, but many still hold on to this hope.
Well, that's it for my list. I know that I've missed some things; so be sure to send in your thoughts.