The Great Recession Bites

The recession might be one year old already, but as anyone can see from this morning's payrolls numbers -- much worse than even the pessimists expected -- it's still getting worse, and there's certainly no end in sight. Once upon a time, this was a financial crisis; at this point, as Brad DeLong notes, we've entered a fully-fledged Great Recession.

Every time I remark to Barry Eichengreen about the disjunction between the intensity of the financial crisis and its limited transmission to the real economy, he says "just wait." I guess we can stop waiting.

The base-case scenario now has to be that things are going to get worse before they get worse. We had a long run up, and we might not see any economic growth until GDP has fallen a lot -- 5% or so. As a result, spending tens of billions of dollars on a Detroit bailout now feels increasingly like trying to catch a falling knife: My feeling is that the Zandi estimate of the cost of the bailout -- $75 billion to $125 billion -- is probably far too low. If we're going to be spending 12-figure sums, we should do so strategically, and not get rushed into it because things are urgent now. Pretty soon, a lot of other things are going to be urgent, too.

Remember that General Motors (GM) is warning of a couple of million job losses should it be forced into Chapter 7 liquidation -- something the government is almost certainly going to prevent one way or another. But even without those job losses, the US economy shed over half a million jobs in November alone. And the employment bloodbath is only beginning.

How do we get out of this mess? I have no idea. But I do know that anybody still hoping for a swift bounce back is looking increasingly delusional. As we saw this morning, the probability of downside surprises is much greater than the chance that we'll get any good news any time soon.

Comments

[Jason Rines...:]

You can't get out of this mess until leadership in Washington is voted out of office Mr. Salmon, historically a four year process. 2012 will be an interesting year for voter revolution.

2008 Dec 05 10:28 AM

[Jackson Cash:]

@ithinkbig
I used to think that voters would have a clue, then I saw how disconnected the electorate really is. Campaigns know this, and are predatory on mis-information, emotions, etc. Look back in 2000 with the Dobson Christian empire, which thought "W" was prophetic. Dobson (Focus on the Family) has real estate in the Pentagon!

In the voice of the preacher on Simpsons: "Throow the Christians a boooonnne".

2012 will be an election like any other... painful complacency.

2008 Dec 05 10:43 AM

[AlexR:]

Good article. Interesting to see that some smart people are finally getting bearish. NOW we must be near the bottom :)

2008 Dec 05 10:47 AM

[Jackson Cash:]

@AlexR

No way Jose', all things in history being consistent then perhaps past performance/assumption... would be indicative...

It's plausible that 30 years of "growth" (even if artificially stuffed under the rug) might unwind. We are seeing the arbitrary lows of just "W" reign. Next to unwind is Clinton.

I think the prudent long term investor has figured out that there is no end in sight at the present.

2008 Dec 05 11:02 AM

[Sentinel:]

First of all the eternal optimists/cornucopians at CNBC are now calling this a "Great Recession". WTF? That's like Bushie calling the recession for a year a "slowdown".

Second, all you folks ONCE AGAIN, calling this a bottom. So what? It's not the reaching of the bottom that matters. It is the LENGTH OF TIME WE STAY IN THE BOTTOM!

You think 500,000+ jobs lost is bad. Wait for January's numbers when they will reach 750,000-1 million lost in ONE MONTH ALONE!

When REALITY really hits the first quarter of next year, THAT"S when you will see the REAL BOTTOM. And the true debate will be about how many YEARS we will be in the bottom AND how many YEARS it will be before we even see 10,000 on the Dow much less the high of 14,000.

Here's my guess.....20 years.

2008 Dec 05 11:20 AM

[Alex Filonov:]

We are getting close to the acceptance. It's Great Depression 2.0. "Great Recession" euphemism is close, but stopped one step too short.

Get ready to buy, buy, buy when they agree on "Great Depression" term on CNBC. That'll be the bottom.

2008 Dec 05 11:42 AM

[anarchist:]

Alex Filonov, I think you are probably correct but the that begs the question that User 305361 ask <how long will the bottom last?> and if history is a clue then we might be looking at least 10 years. Because this market is not capitulating on these unemployment numbers I also must think that we will have some bear market rallies but in the end there will be lots more blood to be let in Wall Street-it's a crap shoot any way you look at it.

2008 Dec 05 12:06 PM

[patio:]

Agree mostly- the kicker is the global nature of this, which could, could mind you, lessen the impact. Things seem to happen so much quicker these days, I doubt we;d see a 10 year bottom.
But like you say, a crapshoot for sure.


On Dec 05 12:06 PM anarchist wrote:

> Alex Filonov, I think you are probably correct but the that begs
> the question that User 305361 ask <how long will the bottom last?>
> and if history is a clue then we might be looking at least 10 years.
> Because this market is not capitulating on these unemployment numbers
> I also must think that we will have some bear market rallies but
> in the end there will be lots more blood to be let in Wall Street-it's
> a crap shoot any way you look at it.

2008 Dec 05 12:42 PM

[Socialism c...:]

We bottom when we end Big Government and Entitlement Government. We bottom when we replace the fascist tax code with solely consumptive taxation and restore freedom. We bottom when we, as a nation, regain morals -- you can't decry the immorality of bailouts without failing to recognize the immorality of abortion and the selfish contraceptive mentality that has fed the live-it-up lifestyle notions now espoused by so many -- that's why we have a population bubble, it's why we have entitlement classes, it's why we are short some tens of millions of would-have-been home buyers who also would have been producers and helping support the soon-to-retire boomers (who now can't afford to!)

All those who wanted 2.0 kids and all those who allowed no-fault divorce to become legally acceptable -- you're reaping what you've sown.

We can't force the re-moralization of our society. But we can fix the government size and control issue:
1) Abolish the income tax and property taxes. Replace with the Fair Tax. fairtax.org
2) Pass a Balance Budget Amendment.

2008 Dec 05 12:51 PM

[Socialism c...:]

BTW, to those saying we have until 2012...there is another national election cycle in 2010...we can replace a bunch of Congress critters then.

2008 Dec 05 12:52 PM

[winnersdon'...:]

HOLD YOUR HORSES!

ALTHOUGH UNEMPLOYEMENT IS INCREASING,...FUEL PRICES ARE DECREASING, WHICH TRANSLATES INTO A TAX CUT FOR THOSE STILL EMPLOYED, AS WELL AS SENIORS LIVING IN THE CHILLY PARTS OF THE COUNTRY.

YES, LOSING A JOB SUCKS!
BUT IT ALSO CAN ACT AS A CREATIVE CATALYST IN LOTS OF WAYS THAT MAKE US STRONGER AND BETTER OFF IN THE LONG RUN.

WE'RE IN THIS MESS TO BEGIN WITH BECAUSE OF THE LIBERALS IN CONGRESS BACK IN 1979 (CRA), THE MORE RECENT INCOMPETANT AND CORRUPT EX-POLITICOS IN FRE & FNM, AND ....30/40:1 LEVERAGE AS PRACTISED ON BROAD & WALL STREETS FOR WAY TOO LONG.

PAY-BACK IS A BITCH, BUT IT HAS TO BE RECONCILED, AND THAT'S EXACTLY WHAT WE'RE GOING THRU.

THE JOBS WILL COME BACK.
ENERGY PRICES WILL REBOUND.
IT'S ALL IN THE DEMOGRAPHICS.

2008 Dec 05 01:01 PM

[nmelendez:]

For all you doom and gloom....every time the market goes down in the morning, it goes up in the afternoon, and viceversa. Uncle Sam is making sure the market does not go under and while he's throughing money at the banks, the banks are buying foreign assets. What do you think will happen when the dollar gets devalued and BoA has a 10% stake in Saudi companies, 15% in China/Taiwan and10% elswhere. Dollar goes down, market goes up, uncle sam gets his money fivefold. If i were China i would be buying the Saudi, Africa and SA...and with USD. Wait..they are. jejeje.
This is a chess match between the dragon and the eagle.

2008 Dec 05 01:52 PM

[User 163792:]

We need to start making more babies fast. More people, more housing needed, more consumption, etc...

The recession/depression will end when people start making more love

2008 Dec 05 02:05 PM

[americafirst:]

I don't understand what the liberals in Congress in 1979 have to do with the impending depression, that was obviously created by the greedy mortgage institutions/brokers who created CDO's SIV's and other financial weapons of mass destruction during the past decade!

2008 Dec 05 02:35 PM

[Robert Nabloid:]

More debt and more bailouts aren't the answer, they're the problem. Why would those in a "wealthy" country require so much debt?

Society accepts debt too easily. People still care about their credit score!! Why? Without a good credit score you can't buy a home or car... Why? Because we have used debt to hide our economic problems for a while. It wasn't always this way.

We need a recession to teach those that take too much debt a lesson in economics and personal finance.

2008 Dec 05 05:35 PM

[Socialism c...:]

On Dec 05 05:35 PM Robert Nabloid wrote:

> More debt and more bailouts aren't the answer, they're the problem.
> Why would those in a "wealthy" country require so much debt? <br/>

True.

>Without a good credit score you can't buy a home or
> car...

False.

>Why? Because we have used debt to hide our economic problems
> for a while. It wasn't always this way.

True.

> We need a recession to teach those that take too much debt a lesson
> in economics and personal finance.

True.

2008 Dec 05 05:44 PM

[raising4dau...:]

> We need a recession to teach those that take too much debt a lesson
> in economics and personal finance.

The lesson has been learned. If I'm connected to Goldman Sachs, Wells Fargo, et al, I can pass my debt and losses on to the taxpayers.

2008 Dec 05 08:58 PM

[mzzz:]

On my daily jog today it occurred to me that had the CPI accurately reflected inflation the housing bubble might not have happened because the Fed would have kept interest rates up. The housing component of the CPI currently reflects rents, not home prices. Some combination of the two would seem to be more indicative - rising home values then could at least cancel out the flat/declining rent rates of the bubble period. No matter what reforms comes down the pike, fixing price inflation measures seems like a necessary first step in keeping Fed policy sane. Just a thought

2008 Dec 06 01:14 AM