Sunday, March 1, 2009

This Weekend's Contemplation - When Will the Recession End

The following is from the NY Times and is a collection of opionions about the current "Great Recession" how it will go and when it will end. The comments are sobering, but realistic. Well worth the time.

James Grant:

“WHEN you stop asking,” was the exasperated reply of the broker to the pestering client who asked the same question over and over during the 1974 stock-market crash: When will it end?

Nobody knew, or could know. The broker, wiser than he realized, chose not to serve up the windy non-answer that fills so much cable TV time today: “Well,” he didn’t speculate, “the bear market will end when the Watergate crisis is resolved and the Federal Reserve gets its arms around the inflation problem and business activity shows convincing signs of a pickup.” Instead, he blurted the truth that bear markets end when investors give up hope.

Hope sustains life, but misplaced hope prolongs recessions. At the root of this paradox is the notion that booms don’t just precede booms, they cause them. Modern-day booms are the products of low interest rates and easy credit. People overborrow, overpay and overindulge. They love the things that borrowed money buys, but the debts become insupportable. Then the assets, or some of them, must go. A little selling — of houses, cars, companies, stocks — becomes a lot, and the next thing you know we’re talking about nationalizing Citigroup.

Wishing that this weren’t happening to them, hopeful business people and homeowners resist making necessary adjustments. Some refuse to sell the house they can’t afford. Others won’t think of selling the stocks for which they paid what seemed a reasonable price only last year but which are one-half of that reasonable price today.

Today’s low prices, painful though they may be, are the market’s own shovel-ready stimulus. Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again — just don’t ask when.

Stephen Roach:

It would be premature to declare an end to America’s recession at the first sign of a resumption of growth. After the unusually steep declines in the economy late last year and early this year, a statistical rebound in the second half of 2009 would hardly be shocking. It could be driven by the gyrations of the inventory cycle. Or it might reflect the first digs of the stimulus package’s “shovel-ready” projects.

But any such whiffs of growth are likely to herald a false dawn, because the consumer remains in terrible shape. American families have lived beyond their means for more than a decade by borrowing against their over-valued homes. With both the housing and the credit bubbles having burst, their stock portfolios down and their jobs threatened, consumers have been shocked into a new frugality. They are likely to be restrained for years to come. The consumption share of gross domestic product is still 71 percent — down from a peak of 72 percent but well above the 67 percent that prevailed from 1975 to 2000.

This points to an unusually anemic upturn, at best — not strong enough to keep the unemployment rate from rising to near 10 percent over the next year and a half. Since it’s hard to call that a recovery, it looks to me as if this recession won’t end until late 2010 or early 2011.

A. Michael Spence:

THE short answer is not soon.

The recession is global: exports, production and consumption are in high-speed descent. The headwinds are powerful because of excessive leverage, damaged balance sheets and the resulting tight credit.

Major financial institutions may be insolvent; their books are hard to assess. European banks have American-style problems with toxic assets and are also struggling because of their exposure to financial turmoil in Eastern Europe. Eastern Europeans borrowed in euros and Swiss francs. Capital exodus and depreciating currencies have caused these debts to rise. And the shadow banking system through which a substantial amount of credit had been provided is no longer working.

Global growth is approaching zero, and the economies of all the advanced countries are likely to shrink in 2009. The prices of stocks and real estate continue to fall, and thus it will take more time for consumers and companies to pay off debt.

These factors have led to, first, reduced consumption and then declining investment and employment. This has lowered sales, profits, credit quality and, completing the loop, asset values. This interacting spiral is what makes this recession exceptional.

Governments and central banks are the only major sources of credit, liquidity and incremental demand — private capital and sovereign wealth funds, having experienced losses, are largely sidelined. If governments are quick and clear in their intentions and intervene in a coordinated way in both the real economy and the financial sector, we will probably have an unusually long and deep global recession through 2010. If they don’t, it is likely to be worse than that.

Willian Poole:

THE fundamental causes of this recession, unique in the experience of the United States, were mortgage defaults and the consequent insolvency of major financial firms. These insolvencies, and especially fear of them, damaged normal credit mechanisms.

The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.

Federal policy is damaging the economy’s prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

Heavy-handed federal intervention into the management of companies from banks to auto makers will also delay recovery. And misguided efforts to help distressed homeowners by permitting courts to rewrite the terms of mortgages will cause banks to limit mortgage lending, which will prevent housing from contributing to the recovery.

The unrelenting anger across the country over bailouts of corporations and households that made unwise and even irresponsible financial decisions is influencing federal policy. Punitive measures, like forcing companies receiving federal dollars to cancel employee events, will increase uncertainty over where the government will strike next in its effort to deflect public outrage. Instead of more bailouts, we need a clear and consistent path to fundamental reform of our financial system.

George Cooper:

TODAY’S financial crisis is the biggest in recent history, when measured by its speed, the scale of its capital losses or its global reach. Yet viewed from another perspective the crisis is surprisingly ordinary, following the same path as dozens of previous bubbles.

While the details of each cycle differ, the core processes remain constant. In the expansion phase, asset inflation and credit creation form a woefully misnamed “virtuous cycle” that drives both asset prices and debt stock to unsustainable levels. Then comes the Minsky moment (named after the economist Hyman Minsky) when the virtuous cycle flips into a vicious one of credit contraction and asset deflation.

Let’s assume that the magnitude and duration of the credit correction phase will mirror that of the credit inflation phase. So when did the credit bubble begin? At one extreme we could point to the mid-1980s, when the American household savings rate began declining almost every year. If we concentrate only on the recent growth of mortgage lending and the shadow banking system, we could conclude the cycle began closer to the turn of the millennium.

If we go by the first measure we may see two or more decades of readjustment. If we go by the second, we are still probably in the early stages of the credit correction, meaning that while the technical recession could be over by the end of the year, the broader credit cycle will likely remain a significant drag on economic activity well into the next decade. Either way, we have a long way to go.

Niall Ferguson:

THIS recession, which began in December 2007, has already lasted longer than the average postwar recession. If it turns out to be as bad as the most protracted of the postwar downturns, we will touch bottom next month.

But my strong suspicion is that we are now in something more like a Great Recession. It won’t produce as steep a fall in American output as the Depression did, but it may prove to be as prolonged.

The depression that began in August 1929 did not hit its nadir until 43 months later. The one that started in October 1873 was shallower but lasted 65 months. If the economy were to keep shrinking for that long, we wouldn’t start coming out of this until after May 2013.

Is that possible? This is a crisis of excessive debt, the end of the Age of Leverage. It will take longer than a few more months to resolve bank and household insolvency, especially with asset prices continuing to fall so rapidly. Even with zero interest rates and huge deficits, Japan suffered a “lost decade” in the 1990s — and that was when the rest of the world was doing well. This recession is taking place as the rest of the world is doing even worse than the United States. The collapse of trade as measured by East Asian export data is petrifying.

So far in this recession, remember, we have had only two consecutive quarters of declining gross domestic product. At the moment, I find it quite easy to imagine two consecutive years of contraction. And I don’t rule out two more lean years after that.

Alan Blinder:

HERE’S the hard truth: Nobody knows when this recession will end. Economic forecasting is a dark art, and predicting when recessions begin and end is its weakest link. That said, my best guess is that growth will return in the fourth quarter of this year. Why?

First, recessions don’t last forever. If the economy continues to slide through the third quarter, as I anticipate it will, this will be the longest American recession since World War II. Housing must hit bottom at some point. For several years now, declining expenditures on homebuilding have subtracted roughly a percentage point from gross domestic product growth. The change from minus 1 percent to (at least) zero will add a full point to growth. Auto sales are also not likely to keep falling at recent rates. Second, Washington’s large economic stimulus should add more than 5 percent to real gross domestic product over two years.

Third, the price of oil plummeted from a peak of around $145 a barrel last summer to around $40 a barrel today. Since the $145 price was fleeting, let’s call the “true” decline from $100 to $40, which means the bill Americans pay for imported oil fell by about $300 billion dollars a year.

But here’s the rub. My forecast assumes that no other (big) shoes will drop. Sad to say, shoes have been dropping like rain.

Marcelle Chauvet and Kevin A. Hassett:

RECESSIONS end, and this one will, too. But the sad truth is, the probability of leaving a recession once you are in one is about the same each month — about 8 percent. It is as if God rolls two dice each month, and the recession ends when he rolls a 10.

We are without question in a deep recession. According to a model developed by one of us that draws on past recession experience and has proved quite useful, the chance that we will be in recession in March is 92 percent, in April 85 percent, and so on.

Many of the key indicators look similar to what we’ve seen before. The decline in employment is above average for past recessions, but smaller than in the downturns of 1960-61 and 1981-82. Industrial production and manufacturing and trade sales have also slowed more than average, but not nearly as much as during the 1973-75 recession, when they declined by 14 percent. And the drop in personal income has been below the average of previous recessions, and even trended up in the last quarter of 2008. So the history books give us cause for hope.

The good news is that the odds of this recession lasting into the fourth quarter of 2009 are below 50 percent. But the dice will be thrown each month, and we could get lucky and be out earlier — or unlucky and be stuck in the doldrums.

Carmen M. Reinhart:

WHEN our economic woes began, analysts took some solace that the longest American recession since World War II lasted 16 months, and that on average our recessions lasted less than a year. But as this contraction continues into its 15th month, we have been forced to look to more severe precedents.

Counting the months of decline, however, is a narrow gauge of distress. A better metric is the length of time it takes the economy to recover to the level of per capita income at its prior peak.
After the most severe banking crises around the world in the postwar period, the economy has taken an average of four years to return to its previous peak in personal income. After the Depression, it took the United States 10 years.

No doubt, the new stimulus package left much to be desired. But it was not a design flaw that the stimulus plan extends over several years, because the period during which the economy will remain below its earlier high-water mark will be protracted and efforts to speed recovery will prove welcome.

Nouriel Roubini:

LAST year, the debate over how long the recession will last was between those in the consensus who argued that it would be V-shaped — only about eight months long like those in 1990 to 1991 and in 2001 — and those like me who argued that it would last at least three times as long, 24 months, and be more than three times as deep as the previous two.

Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.

Even if appropriate aggressive policy actions were undertaken — monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households — the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months.

And things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst.

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