It Will Take Years Before the Current Recession Will End
Many are predicting that the current recession will end soon, by this summer, later this year, or at most next year. I don't believe this prediction, which I see as largely politically motivated or self-serving. Instead, I believe that it will take years for the recession to end unless major reforms are initiated that go well beyond current policy initiatives. Here are some of the many reasons:
• The failed attempt to remedy the situation by TARP and its successor, the US Treasury's private-public partnership plan, that mistakenly tried to fix the economy from the top down, by putting enormous federal funds into major banks and non-bank financial institutions, rather than from the bottom up, through funding homeowners and small businesses
• President Obama's economic stimulation plan, the American Recovery and Reinvestment Act (ARRA), while doing many useful things on infrastructure, the environment, housing, health, etc. has been and will continue to be insufficient to stop the downward economic spiral
• There is still a lack of short-term credit in the U.S. economy, making financing for businesses, individuals, and even governments difficult. Credit markets remain paralyzed, with everything on hold and with many major corporations having failed or at the brink of failing. At the same time, hedge funds and private equity funds, that have provided some small amount of lending, are unwinding, accelerating the economic decline. Until bank and non-bank financial institutions resume lending, there will be a continuing downward economic spiral
• From the viewpoint of potential borrowers, whether businesses, financial institutions, governments, or individuals, risk premiums are so high that they are reluctant to borrow
• There are continuing defaults on mortgages, with many homes going into foreclosure, while Fannie Mae and Freddie Mac are in deep trouble with no way out and no means to help people obtain mortgages or emerge from foreclosure
• GM is closing most of its plants and Chrysler has gone into bankruptcy, closing most of their plans and throwing huge numbers of their workers out of their jobs with repercussions on their employees, suppliers, dealers, and local communities
• States, counties, and cities throughout the country are facing enormous deficits and downsizing with furloughs, layoffs, and reductions in expenditures, with substantial secondary effects
• As unemployment increases more people are losing their health insurance that will lead to more personal bankruptcies since health costs for the uninsured are a major cause of personal bankruptcies
• The collapse of Lehman Brothers, in September 2008, and the change in status of J.P. Morgan Chase to a commercial bank means that we have lost our major investment banks that play a key role in capital formation
• The lax regulatory framework that resulted from the deregulation that took place at the end of the Clinton Administration continues. It paved the way for the excesses of the financial system leading to the astronomical growth of new and risky financial products, such as credit default swaps. They continue, creating huge instabilities for those on both sides of these private deals and are totally unregulated. In addition, highly leveraged financial institutions with unworthy debtors are still a major source of potential instability
• Lax reviews by credit rating agencies exacerbated the situation, while regulatory bodies were ill equipped to render sound judgment on the health of these financial institutions and apply necessary actions. The result was a vicious circle of losses leading to a financial meltdown, that continues
• Other nations worldwide are also in recession and in many cases deeper ones than that in the U.S. so there are no international "locomotives of growth" unlike previous recessions. Indeed, several nations of Eastern and Southern Europe are at or near bankruptcy and will not be able to repay their debts to banks in Germany and other European nations, with secondary effects on the U.S. economy. The agreement at the recent London G-20 meeting on increasing the resources available to the IMF will not be adequate to stop the worldwide downward spiral.
As a result of these and other considerations, this recession will not be V-shaped with a quick turnaround, as many public and private economists have been forecasting. Instead, it will be "U-shaped," with a long economic malaise comparable to the "lost decade" in Japan in the 1990s (and not to the Great Depression). The recession in Japan followed equity and real estate bubbles, as in the U.S., and it lasted years. Similarly, the current worldwide recession could take 6 to 8 years to recover from its official start in December 2007.
Michael D. Intriligator, Professor of Economics, Political Science, and Public Policy, UCLA and Senior Fellow, the Milken Institute
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As long as banks are allowed to pretend they are not bankrupt, we will not even start to recover from the recession.
HA HA First we denied that the country was in recession, which was clear on Main Street for at least 2 years. Now we "can't see our way out of it" for infinity.
*rolls eyes*
All I know? Nobody talking about this knows what they are taking about.
Who is saying the recession will be over any time soon? What we are hoping for is to ease and then stop the downward spiral so we can start the long climb back out. Nobody I know is thinking in terms of V-shaped, or even that the economy will ever return to what it was. The plan is to stop the bleeding and then rebuild a manufacturing based economy. You need to REALLY listen to what the President is saying.
Well, there's yet another reason I would agree with the conclusion, though it's based exclusively upon my own observations, and that's the fact that the 55+ age group I observe are simply "done"; they aren't buying anything and what's somewhat remarkable to me, is that they don't express any interest in buying anything. Another way in which they appear "done" to me is their readiness to take early retirement packages, that and their reported plans for retirement, i.e., retreat to "country" locales far from metro centers expresses to me that they are simply "done" as players in this economy and in fact they've made statements to that effect; i.e., they'v bought their last car, t.v., boat, stock, bond, etc. They appear fatigued and disillusioned to the point of being quite cynical about the future of the U.S., their own futures and their children's futures. They appear to me to be a group in full retreat.
Funding homeowners who knowingly purchased homes with inflated prices that they could not pay for are a better place to put my tax money than Goldman Sachs?
You're an economist?
Prof. Intriligator,... I hope you are wrong on your time scale,.. but methinks you are closer than most of us want to admit.
The anology to Japan in the 1990s is a close one. You could also compare what is happening to our economy to what we saw in the mid 1970s - early 1980s with stagflation.
From what I have read I think the most likely combination is that the economy WILL start growing again by this time 2010, BUT that that growth will be accompanied by inflation like we haven't seen since the late 1970s.
The end result being an economy with numbers that grow at a decent rate, but with most, if not all of that rate being eaten up by the inflation rate. Here's hopeing we don't have to raise interest rates to 15+% again to squash that inflation.
This is a very good article. We have to adress the root causes of the dead end we are in . We need :
--- national health care and retirement
--- industrial policy
--- new trade rules
--- severe regulation of the financial sector
Anything other than this will just perpetuate a paper-shuffling, artificial, speculative economy.
National retirement like in Europe is crucial, if instead retirement depends on the stock market the country can be held at ransom.
Severe regulation of the financial sector would punish no one except ourselves.
Reasonable regulation would benefit everybody.
Future Cars as Cash Cows – They Might Become Power Plants and Kick-Start the Economy
Revolutionary self-powered generators are expected to replace the need to plug-in a plug-in hybrid. A 2 kW generator is on the horizon. It will eventually demonstrate a compact, inexpensive, capability to end the need to plug-in.
It may be possible to provide 100 kW systems that will fit in the space of an engine and gas tank, on a prototype basis within two years. If that occurs, since no fossil fuel or battery recharge is required, automobile manufacturers may conclude that existing engines are likely to become obsolete. Consumer purchasing patterns could begin to reflect a new reality, with the market deciding most future cars must never need fossil fuel.
When a substantial number of vehicles powered by such systems fill a parking garage, it will have become a multi-megawatt power plant.
The cost of many vehicles might be paid for by utilities, as they purchase power whenever needed. The parked cars, trucks and buses, each become decentralized power plants - a rapid, cost-effective alternative to the many tough and costly challenges of constructing new coal burning and nuclear power generation facilities.
Auto makers will have no trouble selling fuel free cars that need no batteries or recharge, and can pay for themselves.
Imagine the potential for stimulating the world economy.
Auto makers have a unique opportunity to lead the nation and the world.
And as our policies move further to the left, years will turn into another decade!
Bush spent us here! Don't forget it.
You cannot be more wrong. The shift to the left will hasten recovery. Despite the grim forecasts above, the polices made are the best possible solutions to help both the masses and the elite. The recovery movement is top-down and bottom-up--aid to corporations while the masses receive expanded social welfare benefits (plus the tax cuts to the middle class and the poor). We will not see the recovery peak early because of the gravity of the mess the previous administration put the US government and economy in. They were far too focused on war and national security while they forgot to regulate the economy plus oversee the domestic needs of the masses.
This recession is caused by the irresponsible free market, pro-war mentality of the then ruling Republican elite. The Democrats were impotent to prevent this because they were shot down every time they wanted to contribute to governance.
Our government is doing too much to combat the Depression. The Great Depression is being touted as a model for what we need to do in order to fix the economy, but that couldn't be further from the truth. The Great Depression was the longest time period of economic stagnation in US history, precisely because the government intervened, starting with the Hoover Administration. If we wanted to be done with this recession faster, we would follow the example of the Harding Administration who sat back and let prices deflate and allowed the economy to liquidate the bad investments and fix itself. Everyone forgets the Depression of 1920-21 because it was both so short and nothing was done to fix it, it fixed itself faster than the Great Depression. Nevermind the fact that the downturn was more severe at the onset of the 1920 Depression versus the Great Depression.
And Hoover was in office from '29 through '32, which was longer than the decline you refer to, so he had plenty of time, according to your assessment, to have fixed things.
The Great Depression was no minor event.
Most America corporations and wealthy American individuals hated FDR. Shortly after WW2 they started funding chairs at universities and essentially paid economists to write books that lied about the Great Depression and FDR.
That's how we got the Bushes.
Hoover tried to fix things by intervening in the market, which caused the Depression to last so long.
All the jobs being outsourced to India and other cheap labor markets needs to stop. Bring back the jobs as Delta has started doing by firing nearly five thousand India call center employees. They are bringing the jobs back only because the poor customer service was costing them lots of customers. America needs to been manufacturing again. It is too late to save the auto industry, but America can move to mass transit, which will help the economy and the enviroment at te same time. America needs to get its priorities straight and stop wasting billions of dollars every month in Iraq and Afghanistan. We need universal health care so companies like GM do not have to add the cost of their employees health care to their product's sticker price. We need college education for all those who want it and maintain a 2.0 GPA. We need a National Service Program besides the military, sort of a US based peace corp where people who received the money for college put their skills to use in rebuilding and bettering America. We need to do all these things and much more if we do not want to become a third word nation.
RIGHT ON RABBIDDOG !
Yes, absolutely. There is no magic solution, only rebuilding our economic system from the bottom up.
rabiddog, I thing you are right and I have been saying all along, we are heading for third world status. Just look at the headlines, wages have been stagnant for the last 10 years and now millions of layoffs, hours and pay cut for millions. Where is this taking us? Third world status, no doubt about it. The Proffesor is right and as Arthur954 says, we need a rebuild from the ground up, not trickle down as it is.
Perhaps the closest comparision from my experience would be the years 1973-1981, an extended period of a lousy economy. While there are differences in what affected long-term slump from the current one, there are several common ones including increasing long-term unemployment, people afraid to loan money, and so on. To me we will be in a slump for 4-5 years, that is about 2014-15 before we see a longer term better level of the economy, although hopefully not entering a new bubble.
Of course it will be a new bubble. It always is.
Green Tech?
I'm betting on an oil/natural gas bubble, accompanied by a gold/silver/copper/platinum bubble.
And the only thing that will 'pop' that bubble will be if prices of those comodities get high enough to inspire increased efficiency, push us to renewable sources, and convince us that real recycling needs to be done.
(and yes - I have been putting my money at it's own small levels in those markets - at least for the next couple of years)
Here's the bad news. You're right for the short term. For the long term, any recovery is going to be impossible because oil prices will immediately rise sharply, curbing any future growth.
What I foresee is a dramatic decline in the worldwide standard of living. Worst case is that there will be widespread disease and famine as governments and businesses are increasingly less able to distribute goods and services. This is not as unlikely as it sounds right now.
Merrill-Lynch Chase???
Nothing has been done to address the root causes of the current economic debacle. The primary obstacle is the deep seated corruption in the Government. These take many forms but the most egregious are in the Defense and Financial industries.
The financial industry has engaged in a massive fraud, enabled by the deregulatory excesses written by corrupt politicians. Briefly, from mortgage and real estate companies through Wall Street securities firms and ratings agencies liar loans, over appraised loans, and every imaginable “creative” loan was fraudulently rated and sold as AAA securities. This was fraud, conspiracy and misrepresentation on a global scale. Far from investigating the miscreants our Government has misappropriated taxpayer monies to keep these criminals in business. Three trillion dollars have gone down the drain and more will follow.
The defense, Wars, security, CIA boondoggles and the continuance of Empire sap one trillion dollars per year from our economy. Far from reining in this ruinous miss-spending Obama has increased it. Moreover, it is the façade of Empire that has made us the enemy of millions and threatens our security. Until we eschew the trappings of Kingly Empire we will continue to throw our blood and treasury into the MIC pit.
I hold out little hope that we will be able to borrow enough to spend our way through Wars, defense of Empire, financial malfeasance, tax cuts including those for the lower and middle classes, welfare, unemployment, corporate welfare, health care, pork and infrastructure jobs creation.
Ole, well spoken, again. Obama needed some people in his cabinet that could think outside the box, Clinton, Geithner, Summers, Gates, ect are not it. He is just a continuation of the "Empire Government". Corruption in Government", no one is talking about it and no one will dare takle it(they got theirs, F the rest).
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