There is good reason to worry about these two dimensions of headwinds, facing the economy are really powerful. But that is all it can to resist the temptation to provide projections of absolute darkness and dispassionate look at how this decline compares still many other recessions we survived.
On the likelihood of deep recession, it is often said that this could be the most serious recession in decades. " This statement is almost certainly true, but not particularly informative, and the last two recessions in 1990-91 and 2001, has known mild and short-lived by historical standards. Therefore, the real question remains: "deepest recession" is exactly how many years?
The most obvious and legitimate link 1981-82 recession, which lasted longer than the average for 16 months and led to a peak of 10.8% unemployment - by all standards, very serious matter. Nevertheless, it will take extraordinary amount of additional serious harm to today's economy for a sufficiently long period to drive unemployment from its current 6.5% to double-digit territory.
It is also important to remember that the 1981-82 recession was almost deliberately caused by sky high interest rates, in the titanic struggle Federal Reserve Chairman Paul Volcker to drive inflation from the system. Unlike the Federal Reserve in response Now was to withdraw all the stops in a different direction, including a sharp decline in short-term interest rates and a barrage of other actions. Several more likely than the current recession, is the 1973-75 recession, usually linked to a surge in oil prices, at the time. This one lasted longer than the average for the 16 months that led to 9% in the peak level of unemployment.
A direct comparison with the Great Depression have become more frequent in recent weeks, given the collapse of the stock market and consumer spending. But those comparisons overlook many key facts. During the Great Depression, unemployment rose to 25%, while GDP fell by 28% between 1930 and 1932, it was inconceivable prospects in the current environment, thanks to the long list of fundamental differences between then and now.
For example, the banking system collapsed in its entirety during the Great Depression and the lack of insurance of bank deposits at that time as a result of catastrophic erosion for domestic wealth and consumption. Today, FDIC insurance (and recently increased the limit to $ 250,000) provided a significant cushion; reaction of economic policy, is immeasurably faster and more aggressive now, and coordinated action among the major economies today to address the root causes of the current episode is so impressive, and absolutely unprecedented.
How long will it last? The prevailing view: possibly through mid-2009. Two points to highlight here:
First, such a forecast is not based on any particular refined to understand that economic forecasts are dynamic in the current downturn. In the end, economic forecasting is a well-deserved reputation obviously imperfect art (most definitely not a science).
Projections about this recession lasting through mid-2009, largely based on the following simple calculation: Do NBER announced on Monday, the prevailing view that the recession began, perhaps, at some point last summer, and it is likely to be about medium length, by historical standards. Given that the average duration of ten recession since the Second World War was 10.4 months and ranged from 6 months in 1980 recession for 16 months in 1981-82 alone, natural "filler" Timing the end of the recession, it seems, in the middle 2009.
However, the fact that a recession is now 12 months, and apparently not close to its trough yet, there are different perspectives that it will exceed the length of 1973-75 and 1981-82 recession (16 months) that makes this the longest since the Great Depression (43 months from August 1929 to March 1933). The crowd loves to make a comparison with the Great Depression would quickly announce a victory at this.
Secondly, a forecast that the slowdown could end in about mid-2009 is not unreasonable, but even if it hides the exact critical question: What kind of recovery will likely follow? Answer: possibly gradual, unlike the more typical (but not universal) model of the economy emerging from the most recent recession roaring ahead, propelled by pent-up consumer demand.
The process of healing is deeply wounded banking system, which has already led to nearly $ 1 trillion write downs, will act as a weight around the neck of an economic recovery in late 2009. Banks are likely to continue the slow process of recapitalization and clean up mountains of toxic assets on their balance sheets for the period more than just the next few quarters.
That task becomes even more difficult in the coming months, a recession, as a would generate an additional amount of toxic assets in their portfolios, impairing their ability to resume a more normal pace of lending. So, even though the economy may technically withdraw from the economic recession in the second half of 2009, the rise in the first stage could be more a question of semantics rather than sound twist in economic activity.
To be sure, this is a major recession and the reduction of risks in a highly volatile financial market environment should not be underestimated. There are reasons, however, believe that its severity and duration, will ultimately provide an unprecedented range of economic policy measures, some of them are already in place, others are under development.
Despite a series of false starts with some of these measures by the Treasury, the Fed seemingly limitless reserves of innovation and commitment to the incoming administration in particular, aggressive fiscal stimulus package should gradually gain some traction, which will help stabilize the economy within the next Three-quarters or so.
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