Norbert Michel earned his Ph.D. from the University of New Orleans in 2003. After teaching at UNO, Loyola University and George Mason University, Michel joined the Nicholls State University Department of Finance and Economics in 2005. Prior to joining the Nicholls State University faculty, Michel was a Policy Analyst for the Heritage Foundation in Washington D.C. Michel has published many papers related to economics.

Norbert Michel--

Lately I’ve been preoccupied with studying the financial crisis. In particular, I’ve been looking for an angle to test whether the credit markets really did freeze prior to the $700 billion bailout. I’m not having great success, but I have come across several unexpected findings.

For instance, I’ve noticed that the U.S. financial crisis is now, supposedly, a leading cause of a global recession. This sort of story, being repeated all over the news, seems a bit peculiar to me. We don’t even have clear evidence that there was a credit freeze in the U.S., much less the entire world, but whatever happened has caused a world-wide recession?

Now, I’m not saying that there is no problem with the derivative securities tied to the sub-prime mortgages; that’s evident. But the notion that these derivative securities, tied to (mostly) a few parts of the U.S. housing market, could cause a global economic recession seems a bit odd. Maybe this scenario is possible, but we need to investigate the cause, not just repeat the mantra.

Yet, the story is getting repeated. In today’s Wall Street Journal, an economist from Wachovia Corp. says “It is clear that the combination of global recession and the global credit crunch is causing world-wide trade to dry up.” An early October article in the Economist is subtitled: At best, the world economy is on the brink of recession. The article starts off:

DEPRIVE a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in. As the financial crisis has broadened and intensified, the global economy has begun to suffocate.

No wonder people dislike economists so much. Let’s assume, for the sake of argument, that we are in a global recession; that trade has slowed, people are buying less, and even investing less. Would the financial crisis be the only explanation? Could there be any other causes?

I had a talk with Morris Coats, and we came up with a brief list of possibilities concerning people’s expectations. In other words, perhaps we are witnessing a global slowdown right now because people expect:

- Higher taxes in the U.S.;

- More economic regulation (Obama promised to let the EPA regulate CO2);

- Less global trade (Obama promised to renegotiate Nafta unilaterally (or not));

- Obama to reinstate the ban on offshore drilling that was recently lifted;

- Democrats to nationalize the U.S. healthcare system;

- Democrats to take over 401(k)’s.

Or, perhaps investors are nervous because the U.S. government has started to nationalize the world’s most formidable financial industry and appears ready to nationalize the auto industry. Or, maybe people in foreign countries are doing worse because the U.S. has stopped importing cheap labor, relegating would-be workers to countries with few jobs.

All of this adds up to heightened uncertainty regarding a significant portion of the world’s commerce. Why would added uncertainty be a problem, you may ask? Here’s the basic story:

People invest based on the return they believe they will get over time (i.e., in the future); when something happens to make that future even murkier, they tend to require a greater return on their investment; If they don’t think they will earn that rate, they won’t invest; If they don’t invest, we end up with fewer goods, services, and jobs.

Financial crisis? Expectations? I suppose I’ll have to pick one, but I’d prefer to wait till the whole thing is over.

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Update on Nov 17, 2008 by At Basil & Spice

Wall Street Journal!