Creative destruction

Back in May, InmanBlog directed readers to a book by Daniel Gross, "Pop! Why Bubbles Are Great for the Economy." 

Gross says that the benefits of new technologies or innovations that often drive bubbles outweigh the pain that's created when they collapse.

When that post ran, many mortgage lenders had gone bankrupt or were in deep trouble, but many observers did not appreciate the full extent to which problems in mortgage lending could threaten the financial system and the global economy itself.

If losses related to mortgage lending hit $400 billion, the leveraged nature of those losses could lead to a $2 trillion cutback in lending, triggering a "substantial recession," Goldman Sachs economist Jan Hatzius said last week.

So on the off chance that we now must look for the silver lining in a national or global recession, rather than a just a collapsing housing bubble, InmanBlog now directs you to "17 reasons America needs a recession" by MarketWatch's Paul Farrell.

Writing from Arroyo Grande -- wine and cattle country on California's Central Coast -- Farrell says a recession will "reverse the dollar's free fall and revive our global credibility," and "expose Wall Street's shadow-banking system."

There are 15 other "benefits of a recesssion." I'm guessing nobody who ever signed onto a risky neg-am mortgage loan ever imagined that they might someday help "trigger an internal recession in China," motivate Congress to "get serious about the coming Social Security/Medicare disaster" or "stop the privatiziation of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars."

I don't know. I think Gross makes a lot of sense, but Farrell wants to take economist Joseph Schumpeter's concept of "creative destruction" -- that bulldozing obsolete firms makes way for new technologies and businesses -- and apply it to the entire economy. 

He's corralled a whole herd of prospective benefits into this column to make his case. But do we really have to go through a recession to "force Washington (D.C.) to get honest about how its going to pay for our wars" or make the "energy and auto industries ... get serious about emission standards and reducing oil dependency"? 

It does make you wonder, however, if there's an analogy for the real estate business. What innovation and new business models helped drive the housing boom, and which ones will survive? Is there an element of "creative destruction" to the downturn, or is it just plain old, destruction? 

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