Sunday, January 4, 2009

Uncharted Territory, Unknown Constraints

A week ago I wrote about planning for constraints. Constraints also apply to the economy as a whole. You might have heard recently that the economy or the financial markets are in uncharted territory. The current situation is not that much like any past situation, so we can only guess at the constraints we are facing.

The reason we are hearing so many divergent opinions on the economy, everything from “onward and upward” to “the end of an era,” is that there are many factors that may be constraining the economy in the short run, and most of the people observing the economy are focusing on just one or two of these constraints.

Washington’s response to the current situation has been so far off the mark because key policymakers are focusing exclusively on just one constraint, the lack of lending liquidity. By focusing on just this one problem, they are making other problems worse and doing the economy more harm than good. Predictions of an early recovery from the recession, which we have been hearing since before the recession started, have come from people focusing on just a single constraint, such as real estate prices, basically assuming that everything else in the economy would be doing fine.

In truth, there are multiple problems with the economy, some of which have not yet been clearly identified. The economy will not be helped by an all-out attack on any one problem, but by measured responses to a wide range of problems.