Peter Clemenza on the economic cycle

8/30/07

NOTED ECONOMIC OBSERVER PETER CLEMENZA EXPLAINS RECESSION

Earlier this week, Michael (“Please call me Mike.”) Jackson, the very capable CEO of AutoNation, called for the Fed to cut the fed funds rate because, as he put it, the economy is “at a tipping point,” on the verge of recession. Mr. Jackson is by no means unique among our nation’s corporate top brass in calling for Fed action to avert recession.

Several questions occur to this observer when he hears knowledgeable people calling for the Fed to “do something” in order to prevent (Heaven forbid!) recession:

First, since when did the Fed’s job become steering the economy clear of recession? One could argue that with the passage of Humphrey-Hawkins (“HH”), the Fed’s mission deviated from a single-minded focus on maintaining the purchasing power of the dollar, but H-H has been given little more than lip service by post H-H Fed chairman. If you don’t believe that, note H-H’s 3% inflation, 3% unemployment goal and our real experience in the post H-H environment.

Second, and more importantly, when did recessions become such bogeymen? When did it become imperative that we do everything humanly possible to keep the economy from experiencing recessions? In the past, the business cycle was an accepted phenomenon, and for good reason. Economies have experienced boom-bust cycles, even if usually milder than implied by that nomenclature, since, well, the beginning of time. In the twentieth century, we had come to expect a recession about every, oh, 8 years, give or take a few years. Recessions were accepted as a necessary phase of the natural working of the economy. While recessions were painful, they were necessary to work out the excesses the economy had experienced during long expansion cycles. Recessions were to the economy what gang wars were to the Mob, according to worldly philosopher Peter Clemenza, capo regime under Don Vito Corleone (It was Mr. Clemenza who discovered young Vito Corleone when both were struggling young entrepreneurs on the lower East Side. Without Mr. Clemenza, the Don would never have built his empire in financial services, entertainment, import/export, and personnel management. Thus, Mr. Clemenza’s reputation was built in headhunting (though this record was sullied by his recruitment of Paulie Gallo and Nick Geraci), along with operations management, but, as this post shows, he was no slouch in economics, either. But I digress; at least I do so parenthetically.): “The Sanitation Department will be sweeping up a lot of dead bodies this winter. (but) These things have to happen once every ten years or so. It gets rid of the bad blood.”

Now, however, we have reached the point in man’s economic hubris at which we think we have repealed the business cycle, that we should never have to endure economic pain in the form of a recession. While I agree that we should do everything we can to avoid, even prevent, recessions from becoming depressions, we cannot avoid economic pain any more than we as individuals can avoid emotional or physical pain. Such suffering is part of life, and it allows us to grow into the people we are capable of becoming. The economic pain of recession is as necessary to sustainable growth, to our long term economic well-being, as physical and emotional pain is necessary to the personal maturation process.

The most regrettable feature of recessions is that they fall most heavily on the poor and lower middle class. That, however, is an economic fact of life. But to hear meretricious economic “experts” who are calling for Fed action in order to bail their patrons on Wall Street out of their arrogant recklessness crying crocodile tears about the ramifications of recession for “the working guy” strains credulity.


Judging from the level of economic discourse one reads or hears in the financial media, most experts have not yet come to terms with the reality that the Fed cannot keep the economy from falling into recession. Almost none have come to the realization that perhaps the Fed should not keep the economy from falling into recession.