Compounding the problem with economists is that they choose to offer solutions that are as complicated as the problems. When you take the uncertainty associated with diagnosing a complicated problem and then compound the uncertainty by adding a complicated solution, there is little chance that things will work out as the economists hope. That’s why I feel we need to address things at a higher level — focusing on the simple instead of the complex.

Fundamentally — and regardless of all of the technical definitions — a bad economy ends when most people feel that it’s over. It’s that simple. Harry Truman wasn’t wrong when he said that “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” A bad economy is personal: it’s all in the way that you react personally to the economic climate around you.

You mention a few historical economic events in your comment and say that “recessions/depressions are self-correcting.” I agree with you that economic events in the past tended to be self-correcting (although who’s to say how their end was affected by attempts at correction). Much like a musical tone struck by tuning fork, the oscillations would eventually fade away, and normalcy would return.

But let me point out a key difference between then and now: the Internet and an era of instant communication. Where in the past there were relatively few news sources (mostly newspapers and more recently a few respected news radio or TV stations), now there are Internet and television stations that take specific points of view and drill those points of view into the reader/listener/viewer. Strike a tuning fork in today’s environment, and you’ll find that the oscillations will be amplified, reflected, and bounced back to the source. Loud feedback will be the result, and the oscillations may not fade away until some of the feedback sources stop.

In my days of systems theory we used to call this a “nervous system” — a system that overreacts to the slightest disturbance and therefore amplifies small events to make them into bigger disruptions. I fear that the world economy has become such a nervous system, and thus my plea to “reset to normalcy” is not just oversimplicity — it may be our only hope.

It doesn’t matter to me whether it’s government, business, the press, or anyone else who leads the charge to reset to normalcy. I give some government examples in my post but I’m not saying the government ought to be the only way to restore the economy to a calmer state. If anyone has a better way then by all means let’s hear some ideas. But I’m not convinced that an “ignore it and the problem will go away” strategy will help much with today’s nervous system economy.

First, there is the implicit assumption that money is a constant–similar to temperature. The exact opposite is true. Money is a commodity with a value that varies greatly. There are countless examples—a notoriously example is that a dollar today will buy twice as much house as it did a couple years ago.

Second, there is the assumption that recessions/depressions do not end without government intervention. Historically the opposite is true. Recessions/depressions are self correcting, unless government intervenes. Most notoriously Japan’s Lost Decades and our Great Depression. Unfortunately, our collective oral history remembers only the recessions that couldn’t self correct so we confuse cause with solution.

Third, there is an assumption that recessions are financial events. The cause is actually a misallocation of labor. This misallocation typically is created by a credit bubble that draws resources away from productive activities into pseudo-productive activities. (Usually good activities, but too much of it) The solution is to reallocate the unnecessary bankers, construction workers and auto workers into productive activity.

The common government solutions all work directly against this. Bailouts attempt to keep misallocated workers misallocated. Temporary diversions like building bridges to nowhere and crushing cars are only marginally better since they divert rather than redirect. Quantitative easing (printing money) is probably the worst government solution. For factors that are too technical to get into here a deflationary phase is critical to recovery. (Thinking through this cycle is a very good mental exercise that I’d highly recommend.) To the extent that the Fed/Treasury succeeds in preventing deflation they prevent recovery. Other financial controls like minimum price and wage controls have the same dampening effect.

From a political perspective the efforts of the Bush and Obama administrations (the short-term economic policies have been similar in both administrations) have been brilliant. But economically the result of these policies (if continued) can only be a prolonged L shaped recession.

It’s rather frustrating to see this happening and know that the 99.9% of American’s are simply not economically educated enough to understand the mechanisms of what is taking place. My only hope is that we will become frustrated enough that we’ll kick out the current leadership team and bring in a new crowd.