

Why This Recession Seems Worse Than '70s and '80s - ALee
http://finance.yahoo.com/news/Why-This-Recession-Seems-cnbc-14354968.html

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mattobrien
This is wrong. This current recession is the worst economic crisis since the
Great Depression. Unlike 1973-75 and 1981-82, we now have a recession in the
real economy and a banking crisis. This is a disastrous combination. The last
time we had such a confluence was, in fact, during the Great Depression.

Taken individually, a recession or a financial/market panic can be quite
painful, but rather easy to remedy. The 1981-82 recession, for instance, was
brought on by the Fed raising interest rates to draconian levels to rid the
economy of inflationary expectations. This produced a sharp downturn. But the
Fed was able to engineer a rather quick turnaround by simply lowering rates.
Likewise, a financial crisis can be quickly contained with little spillover
into the real economy. LTCM in 1998 is a prime example: LTCM's failure
produced a mini-crisis in the credit markets, but a bailout by Wall St firms
contained the crisis before it could have many negative effects on the real
economy.

But a recession in conjunction with a banking crisis creates a self-
perpetuating downward spiral. As banks face losses on their balance sheets,
they hold back credit, and hoard cash. When interest rates reach the zero
bound this problem becomes more acute, because the potential gain from lending
to people in a bad economy does not outweigh simply holding cash. This is a
liquidity trap. Additionally, consumers not only lower spending because of
less access to credit, but also because they're scared, so they save more. But
because banks are hoarding cash, rather than savings being reintroduced to the
economy through bank loans, this money is kept within the banks. The money
supply shrinks and deflation makes debt burdens larger in real terms. And the
cycle of forced selling and lower values feeds on itself.

The experience of the Great Depression was that there seem to be multiple
equilibrium points within an economy. Economies can contract much more than
classical economics tells us they "should", as the cycle of debt-deflation
pushes the economy downwards. This is true of the money supply as well.
Creating inflation seems rather straightforward: have the Fed print money.
Indeed, as the Fed has injected unprecedented amounts of liquidity into the
system the last few months, many commentators have begun to worry about
inflation in the midst of near deflation. But we don't understand money
creation as well as we think we do. We have more of a credit system, and less
of a fiat one, than we acknowledge. So with a liquidity trap, creating
inflation can in fact be a challenge - hence Bernanke's idea of dropping money
from helicopters. So what makes this crisis scarier than past nasty recessions
is that conventional policy is out the door. We're trying to fix a system we
really don't quite as much about as we thought we did.

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TomOfTTB
Well, I don’t know how a "recession in the real economy" differs from any
other recession so I can’t really address that point.

But as for the banks you’re simply wrong. The problem with your argument, and
many like it, is that you hide the actual facts by focusing on the macro. That
produces a lot of analytical fear mongering with no real basis in fact (to
even claim our 7.6% unemployment rate compares to the 25-to-30% rate of the
Great depression is ridiculous).

The fact is I still get credit offers in the mail daily. The banks that are
going out of business are having their assets bought by bigger banks that are
seemingly doing just fine. So I don't see any banks "hoarding cash"

More importantly you still have 92.4% of the population gainfully employed
(and probably another 4% on top of that who are housewives, students or
otherwise not looking for a job). That means there’s still a huge market of
credit worthy people who want to buy stuff on credit.

The great, great, great, great majority of people are not in danger of losing
their jobs. That makes them as credit worthy now as they were a year ago. On
the other end of things banks still have shareholders and shareholders still
expect profits. So in the end you have a supply and demand system that is
still up and running just as it always has (it’s just slowing down).

P.S. To give you one example of the fear mongering going on a lot of people
are quoting Japan’s "lost decade" but very few of them are pointing out that
Japan still had positive GDP growth throughout that decade..

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mattobrien
A few things. First, this is a global recession. I would not expect
unemployment in the US to be as bad now as it was during the Great Depression
simply because the US occupies a different place in the global economy today.
In 1929, the US was the manufacturer and creditor of the world - a position
China occupies today. I would expect the urban unemployment rate in China to
reach the high teens, maybe higher. China is likely already technically in a
recession (their 6.8% 4th quarter GDP growth is a mirage. It is calculated
year-on-year, rather than annualized, seasonally adjusted quarter-on-quarter.
Hence, their 4th quarter was more likely zero or negative, and the first
quarter of this year will be worse). Japan's economy is falling off a cliff at
-13%. And Europe is in awful shape too; Germany's exports have died, and
Eastern Europe is already in a depression scenario with 10% contraction nearly
across the board. The question is where is the demand going to come from? No
one can export their way out of this mess. Many sovereign states could default
as well - small European countries with large banking sectors relative to GDP
are at huge risk - and social unrest will likely only get worse. This is bad.

Second, Japan achieved roughly 1% growth annually during its lost decade, and
that was with spending hundreds of billions on stimulus programs. Without that
spending, Japan likely would have had years of negative growth. That is not a
hopeful model of where our economy is headed.

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TomOfTTB
You're changing your whole point here. In your first post you said...

"we now have a recession in the real economy and a banking crisis. This is a
disastrous combination."

So what you were saying (in response to the original article) is that those
factors made this the worst recession since the great depression. I didn't
understand what you meant by your first point so I couldn't address it but I
addressed your second point. So to have a discussion you should either (a)
concede the point to me or (b) provide a counter point.

What you've done here was to clarify my Japan point and then move on to making
a third point. The problem with that third point is that you're just saying
the world is in a recession. But that wasn't the point of disagreement. No one
disputes that.

The question is whether this recession is worse and the numbers you provided
don't answer that question

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TomOfTTB
I responded to the other comment but I wanted to make one point on the article
itself. I think a lot of the fear right now is based on the negative tone of
the Obama administration and I think they’re doing the exact right thing. Mr.
Resler (from the article) makes the same point by saying...

"It's not surprising that politicians exaggerate this," says Resler, who
predicts "The tone of the message is going to start changing immediately; now
that we have the stimulus in hand, you enhance it by saying positive things."

As someone who was too young to have a vested interest in the Reagan
presidency it seems to me the reason for his success was largely that he made
people feel good about themselves and their country. That made them feel good
about life which in turn made them go out and buy things.

The Obama administration needs to create as terrible looking a crisis as
possible right now because then the recovery is all the more euphoric which in
turn makes people want to go out and buy all the more stuff.

~~~
mattobrien
Obama talking about the economy did not make Lehman brothers fail. It did not
make Bear Stearns fail. It did not make our entire financial sector load up on
risky loans. It did not make mortgage originators and bankers give out
mortgages and loans to people who shouldn't have gotten them. There are real
structural problems in our economy. People are worried for good reason. This
is not merely in people's heads.

~~~
TomOfTTB
When asking "what is in people's heads" the question is the scope of the
disaster not whether there is a disaster at all. No one questions there's an
economic crisis the question is it's scope which is where the Obama
administration's stance becomes an issue.

