Frankly Speaking: Recession now

[ Frankly Speaking for March 24, 2008 ]

Recession. Where have we heard that word lately? Oh, right — just about everywhere. Not two weeks ago, there it was again: Bigwig economist Martin Feldstein told a trade show audience that the U.S. is already in a severe recession that could be the worst since World War II.

"There's no doubt that this year and next year are going to be very difficult years," Feldstein said, according to the Reuters news service.

Feldstein isn't some random Harvard economist with a penchant for understatement. He's the president of the National Bureau of Economic Research, which decides when U.S. recessions start and end. So when Feldstein says it's a recession, you can take that to the bank.

So — now we're in it. But IT departments have been through recessions before. What makes this one any different?

There's an economist's answer to that: Feldstein says the past few recessions have all been engineered by the Federal Reserve to head off inflation by slowing down the economy. The Fed raised short-term interest rates until the economy stalled, then pulled them back down to restimulate the economy and, it hoped, to produce a "soft landing" — or at worst a short, shallow recession.

But this time, the recession wasn't intentionally produced by the Fed. It was caused by the collapse of the housing bubble. As housing prices fell, people spent less; Feldstein figures that house prices have already dropped 10% and consumer spending has dropped by $100 billion, pushing us into recession. Before it's all over, house prices will drop another 15% to 20%, with consumer spending down a total of $250 billion to $300 billion per year.

That's money that won't trickle down into corporate IT budgets.

Worse still, according to Feldstein, the financing tricks that fueled the housing bubble — subprime mortgages financed by complex asset-backed securities — have collapsed, causing credit to dry up. Since no one now knows what real estate assets are really worth, no one wants to loan money. And that's poisoning all the U.S. credit markets.

Without credit, business slows down. When that happens, IT budgets shrink. And that will continue until we hit bottom — and this time, no one is engineering a soft landing.

That's the economist's angle. But there's another reason this recession will be different.

This time, users have more power than ever before. They're more tech-savvy than ever before. They no longer depend on IT as much as they did even during the last recession, after the dot-com collapse. They can do IT themselves, or at least they think they can.

That means the risk of battles between IT and users for control of business technology is greater than ever — especially as we try to lock down, standardize and streamline IT to cut costs as budgets shrink.

Struggles for control are always expensive. This time, users have a stronger hand. If we fight, the battle will be longer, nastier and costlier — just when we can least afford it. Remember, this may be the worst recession in 60 years.

In the past, we told ourselves that the fight was worth it.

This time, there's no doubt: It isn't.

So this recession will be different. It has to be. Our businesses simply can't afford a costly fight with users. We must consult, cajole, convince, compromise, whatever it takes to work with them — and get them working with us.

That's the way we'll survive this recession.

And the way they'll survive it, too.