One Utah

We are well and truly screwed.

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

It’s not a question of if. It’s not even a question of when (since the answer is already). It’s not entirely a question of “What do we do now?”‘

Robert Kuttner:

If that Barack Obama is our next president, the interregnum, now “only” two-and-a-half months, will take on many of the morbid characteristics of the winter of 1932. George W. Bush is a spent force — an irrelevance. On November 5, Barack Obama becomes the chief executive in-waiting, while the legal powers of office still belong to Bush. The Paulson plan, not even a week old, has been adjudged a failure by the world’s financial markets. We are on the verge of a full blown depression, and time is of the essence.

Ideally, the House and Senate leadership, working with Obama’s team, would be developing their strategy for rescuing the economy. A post-election session of the lame duck Congress, Democratic but less so than the incoming one, would be called back to Washington to work on emergency legislation — to recapitalize banks, refinance mortgages, and pump money into the consumer economy . . .

Obama, Bush, Bernanke, and Paulson would do well to avoid the mistakes of the Hoover-Roosevelt interregnum, a stand-off that made it even more arduous to climb out of the Great Depression once Roosevelt finally took office. As difficult as it may be, they need to negotiate a much bolder emergency program that Obama can carry out. And they should move right after Election Day, and begin the planning right now.

The months between the 1932 election and Roosevelt’s inauguration were long - remember this was in the day when the presiden took office in March - and a time of severe crisis. Hoover, like Bush, had no credibility to take action. Roosevelt, however, went into a frustrating and - at the time - unnerving holding pattern. It made his 100 days more dramatic and politically effective but it was a long and frightening winter for Americans - banks and businesses failed, jobs vanished, families lost houses.

That our current policies are inadequate is painfully obviously:

This disconnect between more and more aggressive policy actions and easings and greater and greater strains in financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March the rally in equity, money and credit markets lasted eight weeks; when in July the US Treasury announced legislation to bail out the mortgage giants Fannie and Freddie the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the US government the rally lasted one day and by the next day the panic has moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion the market did not even rally for a day and instead fell 5%. Next when the $700 billion US rescue package was passed by the US Senate and House markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next as authorities in the US and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.) the stock markets and the credit markets and the money markets fell further and further and at an accelerated rates day after day all week including another 7% fall in U.S. equities today.

When in markets that are clearly way oversold even the most radical policy actions don’t provide rallies or relief to market participants you know that you are one step away from a market crack and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway.

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally

This entry was posted Thursday, October 9th, 2008 at 3:49 pm and is filed under American History, American People, Economy. You can leave a response, or trackback from your own site.