The Not So Great Depression

Earlier than many, I have written that our period of economic weakness was a depression, not a recession. Here are a few examples:

• Recession or Depression?

• What is a Depression?

• It’s Called a Depression

Depressions are ill-defined. Some say that it is a 10% decline in real GDP. My view is more qualitative. When the banks can’t lend, it is a depression. We didn’t call 1973-4 a depression; the banks were stressed but not dead. Our banks are in worse shape now, and the level of bailout/stimulus needed to make them willing to lend freely is staggering. (Aside from that, do we really want to dig ourselves into a deeper liquidity trap?)

We have others willing to declare a depression, for example: IMF Chief Says Nations in ‘Depression’. We have others willing to blame the weakness on flawed monetary policy and flawed credit regulation. That piece, from the author of the Taylor Rule, is the best I have seen from a reputable mainstream economist.

I still hold to my view that depressions occur not because of trade wars, tight fiscal policy, or tight monetary policy. Those factors have negative impacts, but depressions occur when overall debt levels get too high, with layers of debt upon debt, allowing for cascades of failure to happen when the private enterprise system can borrow no more, and cannot service the debt.

I have not read the Credit Suisse report cited by Paul Kedrosky, but I am similarly dubious that their analysis of total debt levels makes a difference. Consider the levels of leverage now versus the 30s, and consider whether the banks could lend or not. To me, they are peas in a pod, and similar to Japan in the late 80s. Leverage builds up, and eventually can’t be serviced.

Few want to talk about the event that I call “The Not-So-Great Depression.” Our present circumstances may end up better or worse than the Great Depression, but it will end up worse than recessions in the latter half of the 20th Century, in my opinion. Be wary, and play it safe where you can.

Comments

[Jubilee Year:]

Is there anyone who disputes that high debt has caused this problem? Why aren't our leaders talking about debt write-downs, as they are so obviously necessary?

Feb 10 04:48 PM

[Larry House:]

Thanks, David. I don't know what to call this. I started earning my own way in 1966. I have dealt with all of the ups and downs in the economy since then. My first full-time job was in 1970. My wife, our baby girl, and I were able to buy a house and a new car and live on $7400 per year. Our standard of living isn't any better today on several times that annual amount. I know the current economic event feels different than anything I have experienced before. If it is not a true depression, I think it definitely will be the deepest recession since the 1940s. I don't know that it matters what we call it. It is going to be a slow, painful process to get through this, and I hope and pray we all learn from it, rearrange our priorities as needed, and come out on the other side as better people. I am truly afraid, however, that our government's actions to reflate the bubble will do us irrepairable damage. I am concerned about the long-term impact. We have no one to blame but ourselves, but it will be a bitter pill to swallow.

Feb 11 12:07 AM

[svkoho:]

Thank you for another sensible article, David . All the actions so far have demonstrated utter incompetence by the federal and banking authorities and this mirrors the greed and fiscal incompetence of the American people who have borrowed to live a dream which in reality was always a nightmare .The debt and leverage bubble is going to pop and the foolish and self serving bailouts just delay the inevitable. Obama is being dragged along by these Keynesian knuckleheads and his first term is looking like it's failed already. The big banks are insolvent as as a large segment of the population and many companies, states and municipalities. Borrowing my kids money to delay liquidation is a horrible idea. It is time to take inventory and either nationalize the banks or allow the smaller banks to thrive and expand or to form new banks which do what banks are supposed to do: accept our money, hold our money and lend our money. And one question: why are banks and mortgage companies STILL being permitted to securitize our debt? why has this not been banned?

Feb 11 10:40 AM

[Anonymous 2:]

Younmention a few authors who discuss "Depressions". I have three books on my night stand (Each given to me by reasonably sophisticated and well versed investment professionals with whom I have some of my investments - different fund of hedge fund managers) .
Althouugh written in 2007, 2008 and 2009, their views and comments viewed now demonstrate that they were keen observers of what was in the process of happening. Each believe that "it ain't over yet" and things will get MUCH worse before they get better and the timing for getting better is measured in "many years" not "within the next year or or 3".
Richard Bookstaber's A Demon of OUR own Design
Paul Krugman's The Return of Depression Economics
Don Braby's The Approaching Winter - The Next Great Depression
Richard Bookstaber's June 2008 Testimony submitted to the U S Senate Banking SubCommittee on Securities, Insurance and Investments "Risk Management and Its implications for Systematic Risk" is available using google and provides a glimpse of how well he understands what has been going wrong and provides specifics as to what he feels shopuld be done.
If and when all of Obama's staff and cabinet read Bookstaber's views and perhaps the other books, I will sleep better.

Feb 11 11:37 AM

[Jason Rines...:]

Great article as per norm Mr. Merkle. I called what was going to occur, why and when with a high degree of accuracy, you called it and a few dozen others on the blogosphere and well in advance. Kudos for us that we can now assure our families well being and slowly but surely do our Patiotic duty, hoping someday our little recognized contributions offer a reward.

The net out is this: Until we run for office this continued crop of leadership will continue to operate under a failed economic hyposis. Nicolas Taleb summed it all up so succinctly the other day on CNBC when he stated that the problem is, none of us are government. 2012 Congressman, Mr. Merkle has a nice ring to it. Even though I am a conservative, maybe I'll run as a Democrat.

Feb 11 03:15 PM