Recession? What Recession?

Recession? What Recession?

It's a pretty good bet that the U.S. economy will slip into recession early next year. But even with all the warning signs, most forecasters still say it's unlikely.

There is a simple reason the pros, as a group, never manage to predict a recession: If they did, and people believed them, then the recession would begin right then and there. After all, if you were an investor, consumer or a business executive and you believed, with a high degree of certainty, that the economy was about to shrink, you'd quickly take defensive measures -- selling stocks or pulling back on hiring, investment and spending. And if everyone did that at roughly the same time, those collective actions would trigger a recession, whether one had been inevitable or not.

In other words, a recession, by its very nature, cannot be reliably predicted. And the same logic would apply to the beginning of an expansion. Which leads one to wonder: If economic forecasts are incapable of predicting cyclical turning points, why bother with them at all?

Ungilding the Parachute

What would it take for corporate boards to agree on employment contracts that don't grant executives huge severance packages if they are forced out for doing a lousy job?

The standard contract now pretty much lets the executives walk away with huge severance unless they are guilty of gross negligence, willful misconduct or fraud.

But surely someone could come up with an intermediate standard that sets the bar a bit higher and allows companies to take back stock and options from executives forced out because of poor performance or bad business judgments. And if some candidate refused to accept those terms, maybe that should be a tip-off to the directors that he isn't the best candidate after all.

Ailing Mortgage Giants

If there is any surprise in the recent write-offs and reserves being taken by Freddie Mac and Fannie Mae, it is that anyone would be surprised by them. After all, Freddie and Fannie are the biggest insurers of credit risk in the mortgage business. And at any time, their portfolios are stuffed with mortgages and mortgage-backed securities. More recently, they were under pressure to enter the subprime sector to show they were doing more to help low-income households.

So given the big spike in foreclosures and the collapse of the market for mortgage-backed securities, it would have been odd if Fred and Fan were not in financial distress.

That's not to say Fred and Fan are blameless.

For many years, they lulled shareholders into believing that they were really growth companies that had largely hedged all their various risks. Overly optimistic accounting was one result. So were analyst presentations promising double-digit earnings growth in good times and bad.

The mortgage giants can also be faulted for not fulfilling their role as the industry's standard setters by agreeing to buy and insure loans that required insufficient documentation or too little equity on the part of the homeowner. They were in a position to blow the whistle on loose lending practices, and they didn't.

That said, this isn't the moment for Fan and Fred to pull back. It is the moment for them to restore sound underwriting standards, find creative solutions to the foreclosure crisis and provide additional liquidity where it is needed -- even if it means cutting dividends and raising additional capital on unfavorable terms. In doing so, they also would provide a needed reminder that investing in these companies is not a one-way bet.