Recessions Are Self-Correcting

Via Forbes

by John Tamny

Banking giant JPMorgan Chase announced Feb. 23 that it would be cutting its quarterly dividend by 87% to a nickel per share. At face level, this sounds bad, but the savings will speed the process by which it repays TARP funds in order to avoid problematic government oversight; plus, the extra capital cushion puts the firm in a better position to make acquisitions of flagging competitors, should difficulties in the banking sector drag on.

The JPMorgan example is important for reminding us that both individuals and companies frequently respond to economic difficulty in ways that ensure recessions are short-lived. To put it simply, when left alone, recessions tend to correct themselves.

Broken down to the individual, there's a fear factor that is part and parcel of downturns. First off, whether employed or unemployed, we save more and our savings very often flow, through bank lending, to capital-starved businesses eager to grow. There are no profits without saving first, and recessions induce us to save.

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