Recession, Not Depression

The stock market may be down, but the economy is on the way to repair itself. Unemployment will rise for some time because it is a lagging indicator. But the stimulation package, combining monetary easing and fiscal stimulus, will inevitably bring about a noticeable, though not rapid, recovery before long.

Many people criticized Greenspan for causing the bubble by excessively lowering interest rates. Actually, his worse mistake was his disbelief in regulation. Financial markets always involve some people taking custody of and managing other people's money. Without proper regulations, money managers are liable to cause mischief. Financial markets are supposed to help people manage risks, but excessive leveraging, which many financial market developments encourage, always will lead to very high risks.

Many people had blamed securitization. Actually, if there had been no excessive leveraging, securitization would not have led to problems. The housing bubble was formed not so much by securitization and by low interest rates as by the lapse in the enforcement of lending standards and transparent interest costs.

I had actually warned in 2005 that interest rates had been raised excessively and that the economy was saved from a recession largely by strong exports helped by a weak dollar. This time around, the strong dollar is hurting US exports. In Europe, Mr. Trichet had been slow in easing money and also had its share of regulatory lapse. While many people are pessimistic about the UK economy, based on its aggressive monetary easing and fiscal stimulus, I am predicting that the UK economy could be among the first to stage a recovery. Indeed UK retail sales showed an increase of 0.7% in January.

Because of the decision not to "bail out" Lehman (LEHMQ.PK) and the delayed policy responses to deal with housing and the delayed actions on dealing with toxic assets, I am not happy with the way the Fed and the government had conducted its rescue policies. But the more recent initiatives are sensible. US retail sales, at 1% growth in January are also unexpectedly strong. With businesses paring their inventories and retail sales up, it won't be long before they place their orders. Only then will the manufacturing sector see better days.

In any case, this is a deep recession but certainly not a "depression." I must say it was a close call, but luckily our policy makers mended their ways and are on the way to mending the economy.

Comments

[margel:]

You are quite wise in pointing to the causes of the crisis as coming from over-leveraging and regulatory failure. But I disagree with your assessment about the British economy. Their banking system is in greater disrepair than ours because it was much more severely undercapitalized. The economy also was more dependent on financial service for GDP and employment growth. The lower pound may help English manufacturing exports, but it was financial services that caused national income to grow, and at this point I do not see any policy on the part of Labor or the Conservatives to deal with that issue.

Feb 22 12:44 PM

[Roger Knights:]

"this is a deep recession but certainly not a 'depression.' "

Let's split the difference and call it a decession.

Feb 22 12:49 PM

[Dave Wrixon:]

You have just grossly under-estimated the size of the problem.

The extent to which nations are going to be affected depends on the level of indebtedness. This means the US is going to be the hardest hit, whilst the idea that it will somehow affect Europe and China more is somewhat ridiculous. As soon as the myth of the dollar being a safe haven is exposed, then the disjoint the US has caused across the globe will be seen in context.

In the meantime, avoid US debt like the plague. If then don't default then they will deflate the debt by inflating everything else. It worries the hell out of me when politicians start trying to assure us they not going to do something. It is a bit like a vote of confidence in a soccer team manager. Usually within a week or two they are history.

Feb 22 01:13 PM

[bosun.j:]

The Author wrote: "In any case, this is a deep recession but certainly not a "depression." I must say it was a close call, but luckily our policy makers mended their ways and are on the way to mending the economy."

Gong dai wah!

Feb 22 03:51 PM

[logicalthought:]

What do you mean when you say:

"I had actually warned in 2005 that interest rates had been raised excessively"

You're kidding right? Greenspan should have created even a BIGGER housing bubble than he already did???

Feb 22 08:23 PM

[ddearborn:]

Good Morning

I have to say just as politely as I possibly can;

"Are you crazy?"

I have to question your definition of a depression vs a "recession"
By any traditional measure we are already in a depression. This "not a depression" talk is pure nonsense. Trying to calm the victims of the largest transfer of wealth from the working class to the very rich perhaps? In the final analysis it is just another example of a small group of insiders stealing from everyone else.

Feb 23 10:01 AM

[MGA_1:]

Huh?

I think if there is any lesson here, banks should be forced to keep loans on their books - they may have thought twice before extending a lot of these bad subprime loans.

Eventual depression -> 10% drop in GDP. There won't be an upturn for awhile. You can't build and economy on debt.

Feb 23 07:09 PM

[retired avi...:]

Lok, I have to agree with you wholeheartedly.

The financial markets have gone too far in devaluing securities relative to the economic fundamentals. The 'doom and gloom' attitude that prevails is because: 1) almost all the news for months has been about economic and financial crumbling; (yet the current economic statistics are nowhere near 'Depression' levels (unemployment, GDP contraction, deflation, etc.) 2) the stock market plunge has seemed to verify the theory that everything is going to hell, and 3) short sellers are now enriched and emboldened - they feel their thesis has been validated. At the same time, long side investors were burned repeatedly buying on any 'dips' in the last year - as a result, they are too poor and whipped to buy any more. That's why there is a lack of support in the market, as the big funds don't get any net inflows. If the market keeps going much lower, it will be nothing more than a reverse bubble - the ideal time of a lifetime to buy in.

The stock market in the late nineties was irrationally exuberant, but you could hardly tell anybody that at the time (Greenspan tried). Now it is irrationally morbid.

In the end, it's all about earnings and all these theories being bandied about won't mean a thing. Earnings will return and they will resume inexorable growth at some point. The question is when.

Interestingly, even if we have a 1930's Depression, by all historical accounts now would still be a good time to buy stocks! After every 40%+ market decline in US history was a great time to buy from the viewpoint of 5-10 years later.

Feb 23 10:10 PM

[Tom Ford:]

Lok, I also agree. If that ass Bernanke hadn't raised the interest rate 11 times in 17 months based on perceived "inflationary pressure" from overseas we would not be in the position we find ourselves in. Thanks for your insight.

Feb 24 12:23 AM

[P. Kalven:]

"A proposed definition for depression is a sustained recessionary period in which the population is forced to dispose of tangible assets to fund every day living" en.wikipedia.org/wiki/...)

"is a decline in real GDP exceeding 10%, and the other is a recession lasting 3 or more years" en.wikipedia.org/wiki/...)

"You can't build and economy on debt." Seems to be antecedent.

"By any traditional measure we are already in a depression." An inaccurate assumption in this comment from your critics, unless we're referring to state of mind. There I might agree given the vitriol I read everyday.

There is no doubt we're in hot water and I for one am happy to have you throw a little cool water into the bath Lok Sang Ho

Feb 24 12:40 AM