Will this be a depression?
Posted
Oct 07 2008, 11:28 AM
by
Anthony Mirhaydari
Rating:
Americans sure are in a gloomy mood. A recent poll finds that 60% of us believe that a full-blown depression is somewhat or very likely.
Since a depression has no official qualities (besides being worse than recession), the pollsters cited a few economic measures from the 1930s during their survey: A 25% unemployment rate, widespread bank failures, and millions of people homeless and unable to afford basic necessities. Other measures of consumer sentiment corroborate these findings.
Before you blow all this off as the irrational rumblings of an unhappy electorate, know that Wall Street's economists are starting to see a similarly dour picture. David Rosenberg of Merrill Lynch penned the following comment in a note to clients on Monday:
"It truly is a modern-day depression, in our view -- what else do you call it when an entire industry vanishes (investment banks) in less than a year; the ranks of the unemployed soared more than 30%; and nearly one in ten homeowners with a mortgage are either in arrears or foreclosure?"
While a repeat of the Great Depression isn't likely -- automatic stabilizers like welfare and unemployment insurance are in place, the government and the Federal Reserve are accommodating -- the present situation needs to be put into perspective. After the successive failures of two of the largest asset bubbles in history, our present situation is an outlier; that is, it isn't a normal cyclical downturn of the business cycle.
Morgan Stanley economist Richard Berner is looking at two "adverse feedback loops" that could pull things lower:
"Spreading weakness beyond housing to consumer and capital spending, and from a global slowdown to U.S. exports, will promote further declines in employment, in turn pressuring income, consumers, and their lenders. A second vicious circle runs from tighter credit to a weaker economy, then to a deterioration in credit quality, in turn increasing reluctance to lend."
The depth and length of this downturn now depends on the policy response out of Washington D.C. and the willingness of foreign governments and investment pools to fund the resulting budgetary deficit.
(Disclosure: I don’t control a position in any of the companies mentioned)
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