Bloomberg’s Tom Keene points us to Robert Feldman’s 2001 work on Japan’s long economic winter. Feldman notes that following a major economic crisis, economies seem to follow a very predictable set of steps: Crisis, Response, Improvement, Complacency, Repeat.

Although written about Japan, it is certainly applicable to both the US (2007-09) and Europe (2011-13). My reinterpretation and updating of Feldman’s Crisis work is as follows:

1. Response: When any crisis reaches a panic stage, authorities will typically react (and overreact) creating an overwhelming response to the crisis. This usually includes lots of cash and some immediate legislative relief.

2. Improvement: This response throw enough money at the problem that symptoms are temporarily relieved. The improvement is not structural, but rather, is driven by a sugar rush of excess liquidity. It feels good but it is not economically nutritious.

3. Complacency: The baling wire, chewing gum and duct tape improvements of the temporary patchwork repair creates a false sense of accomplishment. The improvements feel good, the data improves, markets rally. Thios leads to a sense of complacency amongst all parties (Government, private sector, banks, consumers, etc.)

4. Repeat: With few of the structural problems fixed, the excess liquidity eventually flows to the same sources of the original crisis, setting the stage for the next crisis .

Feldman’s keen observation was that the natural consequences of complacency is an eventual return to crisis. As of 2001, Japan was beginning their fourth CRIC cycle.

Bringing us up to date, the US appears to be deep in the Complacency stage. Things have noticeably improved, but the structural problems underneath remain.

In Europe, we seem to be late in the Response phase, awaiting the early Improvement part of the cycle to kick in.

Unlike Iceland or Sweden. neither the US nor Europe has addressed the fundamental underlying problems. Which simply means that somewhere off int he future, we will enjoy the Repeat phase . . .

>

Sources:
Cobwebs and CRICs Japan Economics
Robert Alan Feldman
MORGAN STANLEY, April 4, 2001.
http://www.wcfia.harvard.edu/us-japan/research/Feldman.CobwebsCRICS.pdf

Crisis, Response, Improvement, Complacency, Repeat
Tom Keene
Econocchat, March 05, 2012
http://www.businessweek.com/articles/2012-03-05/crisis-response-improvement-complacency-repeat

See also:
Interview: Tom Keene, Robert Feldman
July 11, 2011 6:06 AM  
http://www.istockanalyst.com/business/news/5288166/robert-feldman-managing-director-morgan-stanley

Category: Bailouts, Markets, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “CRIC Cycle: Crisis, Response, Improvement, Complacency”

  1. Almitra says:

    I generally don’t provide links for my comments, but put this together some time back and it seems apropos: http://www.youtube.com/watch?v=E9lO7IvPcBE&feature=player_embedded

  2. AtlasRocked says:

    A good start would be the American people to demand prosecutions of crooks and get back to enforcing the laws as written, not as we wish for them to be.

    Start with the FCIC and a few hundred prosecutors and put the the crooks in jail as Bill Black did after the S&L crisis.

    If we’re not enforcing the laws on the books, how do we know the existing laws work or don’t work? Or the old, pre-crisis laws ? If there are too many laws to enforce, or they are not applicable any more, we need to strike them from the books, not selectively enforce them on political enemies.

    One of the main reasons for gov’t is so we all play by the same rules. Fiscally, constitutionally, fraudulently, we’re not all playing by the same rules any more.

  3. constantnormal says:

    Solutions arise only via leadership and follow-through.

    We are doomed.

    No leaders, and our Congress is unable to follow their own crooked noses to a conclusion.

  4. abelenky says:

    Some minor editing is called for:

    “This response throw enough money at the problem”
    “Thios leads to a sense”
    “somewhere off int he future”

  5. AtlasRocked says:

    constantnormal: We are a democracy, leadership begins with us. No party nor politician is responsible.

    Laws exist to keep unhealthy spending incentives out of the citizens hands, the Constitution specifically left certain powers that had been abused for centuries out of the hands of the citizens, at the federal level, and left it to the states.

    “It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” – Thomas Jefferson

    Debt-mongers have existed for centuries, our current policy advocates aren’t the first to demand the next generation pay their bills.

    We have a populace voting to build deficits, not a leadership team acting against their wishes. And we have too much war. The folks against the deficits are mocked as nutjobs.

  6. willid3 says:

    ar, i understand the ‘debt mongers’ concern. but they need to also look at their own version. using their logic, they should never buy a house or a car. because the debt is too high. if we look at the Federal budget, and try to extend it out for 50 years (never mind that any thing we try extend for the next 30 day or even shorter is going to be wrong, 5 min after we produce it) and then ignore how much income is earned isn’t being realistic. if what really expect is that the economy will continue to shrink to where its smaller than today. and that 99% of us will continue to have shrinking incomes. then we really need to know why that is.