Why This Recession Seems Worse Than '70s and '80s
finance.yahoo.com
finance.yahoo.com
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.
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..
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.
"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
"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.