The Great Moderation—Dead or Alive?
Yolanda Rivera
MBA6008
Global Economic Environment

Abstract
The purpose of this paper is to analyze and critique the Harvard Business Review article, “The Great Moderation” written by Diego Comin. I will discuss its causes and effects as well as the end of an economic cycle. Additionally, the information gathered can be used to better understand how and why “The Great Moderation” is no longer a valid method of the business cycle.

According to Diego Comin, (2012), the Great Moderation can be defined as “a decline in aggregate volatility”. If a business cycle or quickly engineered spending policies are implemented revolving around political motives we can realize an increase in the margin of error (Hammond, J.D., 2011). The volatility of today’s global markets is growing at an alarming rate, even more so than during the great depression suffered by America in early 1930s.
Beginning in 2007, the United States began seeing the effects of the end of a business cycle or “The Great Moderation coming to a close. For years, we have seen prominent growth cycles with limited down turns which reached a climax into a very strong world market. Todd Clark, (2011) explains that, “most recently, the severity of the recession that started in late 2007 has led some observers to conclude the Great Moderation is over.” There were many contributing factors revolving around the 2007 recession in America. For example, the growth of the housing bubble; the rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline (which lasted from the mid-70s until its collapse in 2007-2008). Additionally, in the years leading up to the crisis we seen a growth in subprime lending and fraudulent underwriting practices, not to mention the automotive industry bail outs and the list goes on and on.
We can now get a better picture of how the Great Moderation is now coming to an end. For instance, the United States Dollar is essentially the world dollar which means when we have negative impacts on the US dollar or currency the effects are recognized worldwide. Fraudulent activity along with subprime lending and predatory lending played huge dividends to the volatility of the market in 2007-2008. “Companies like Maxidrive Corporation, computer disk drive manufacturer, who mislead investors with false or fraudulent financial statements” (Libby, Libby, & Short, 2011). Establishments comparable to Maxidrive Corporation falsify balance sheets, income statements, statements of retained earnings and statements of cash flow in an effort to cheat investors, prospective buyers and clients. Many times you can see companies like this push their numbers forward to the subsequent quarters to make it appear as if they are generating profits and in reality they are deeply in the red.
We know that if the US Dollar weakens it has an effect on the global economy. We know that if enough financial institutions continue to lend using ulterior motives the US Dollar weakens (this will not be an immediate impact but in the long run it will prove critical to the USD). Finally, companies who intentionally misrepresent their financial activities to mislead investors, buyers, vendors, and customer base assist in weakening the United States Dollar.
There are several commonalities associated with this. The deficiency of ethical behavior or the lack of business ethics and morals is associated with both. Business ethics can be defined as “the study of what constitutes right and wrong or good and bad human conduct in a business context (Shaw, 2008). There are numerous contributory factors relating to the loss of ethics and morals and their correlation to business ethics and morals, principles and practices. Nonetheless, the effects of being morally or ethically deficient proves critical in the volatility of the United States and Global markets because of the long term effects associated in the long run of that behavior. “Repeated waves of business scandals over the last two or three decades demonstrate how easy it is to get away with mischief—perhaps not indefinitely, but long enough to destroy a company” (Hooker, 2011).
As described by William Shaw (2008). “Pressure to conform to the group and to adhere to its norms and beliefs can lead to the surrender of individual moral autonomy. This tendency is enhanced by the fact that group actions frequently involve the participation of many people. As a result, responsibility for what an organization does can become fragmented or diffused throughout the group, with no single individual seeing himself or herself as responsible for what happens”.
For example, the global market and many times small companies see the upside in gains within the US market fail to realize that we also have economic downturns. David Ricks (2006) expresses that “Since most foreign investors in the United Sates do not have their stock listed on U.S. markets, they seldom make an acquisition through stock swaps. This means that they are usually forced to borrow money.” Unethical business behavior has a longstanding effect on both national and global business markets and its volatility. And the lack of those principles played a key role in the demise of the Great Moderation moving to the wayside.
Nowadays it is well known that the United States government stepped in and put forth approximately $11 trillion in stimulus monies. They have committed or invested a sum nearly equivocal to the United States debt of $15 trillion. For example, companies like American International Group (AIG), Citi Group, General Motors, Bank of America, U.S. government bond purchase, the Economic Stimulus Act of 2008, Unemployment benefits, and many more have received bailout funds from the government (Goldman, 2009).
In today’s business world the government is overstepping its boundaries by getting involved in the financial matters of our economy. Conversely, the federal government is adding fuel to the fire because they are looking for quick fixes on a problem they should not be involved in. Our federal government has assisted in our $15 trillion dollar debt because they are ineffective in their financial management skills; they dip into sources such as Social Security, Medicare/Medicaid as well as pension reserves. Our government can learn from strong business leaders on how to get out of debt and assist in the reduction of the volatile markets but they cannot do so by initiating a quick fix for every issue.
For example, if Jane Doe has $50 and she spends $10 she now has $40 and if he then spends $50 more dollars she now has a total of $-10. This translates into Jane Doe being in debt for the negative balance. In Layman terms she is “broke”. She could borrow the money kind of like the United States Government has been doing and pay it back later. She could take out a loan like the United States Government has borrowed from China. Nonetheless, at some point, if Jane Doe continues acquiring debt she will eventually be at a point when no one or no institution will allow her to borrow because she will be out of collateral and then Jane Doe will be bankrupt.
In conclusion, the United States Government encompasses a number of tools that, if used properly, could decrease the volatility of the markets and possibly counteract the effect of the Great Moderation. But they are unethical in their behaviors in the same manner as the corporations were that I previously mentioned. Federal Government can be defined as “A government with strong central powers. The organization that is the governing authority of a political unit” (Freedictionary.com, (2011). The United States Government should stick to what it knows best and that is politics not financial management.

REFERENCES

Comin, D. (2011). The great moderation, dead or alive? Harvard Business Review, pp. 13-25. New York: McGraw.
Clark, T.E. (2011). Is the great moderation over? An empirical analysis. Kansas City Federal Organization. Retrieved on June 25, 2012, retrieved from, http://www.kansascityfed.org/PUBLICAT/ECONREV/pdf/09q4Clark.pdf.
Hooker, J. (2011). Business ethics as rational choice. Upper Saddle River, NJ: Pearson.
Goldman, D. (2009). CNN Money. CNN money.com’s bailout tracker. Retrieved on June 26, 2012, retrieved from, http://money.cnn.com/news/storysupplement/economy/bailouttracker/.
Hammond, J.D. (2011). Friedman and samuelson on the business cycle. Cato Journal, Vol. 31. No 3 (Fall 2011). Retrieved on June 25, 2012, Retrieved from, http://www.cato.org/pubs/journal/cj31n3/cj31n3-16.pdfhttp://web.ebscohost.com.library.capella.edu/ehost/pdfviewer/pdfviewer?sid=5e9822db-c5fd-401e-9215-e67cd46ff0e9%40sessionmgr15&vid=4&hid=11.
Libby, R., Libby, P.A., & Short, D.G. (2011) Financial accounting. New York: McGraw.
Ricks, D.A. (2006). Blunders in international business. Malden: Blackwell.
Shaw, W.H. (2008). Business ethics. Thomson: Belmont.