Some Perspective: Comparing this Recession to 70's and 80's

There's a very simple difference between this crisis and those in the 1970's and 80's. During the 70's and 80's, the fundamentals were worse (losses in manufacturing, exports, etc.), but we could mask it with inflation. In 1971, we pulled off the partial gold standard so that we could inflate without robbing all the remaining gold from Fort Knox. Then in both of those recessions, the Fed lowered rates, which inflated our way out of it. That's possible when you're cutting the rate from 12% to 5% or 18% to 8%, but now we're at 0.25%. Right now, the inflationary knob is turned all the way to 11, and we're still not able to inflate our way out of recession/depression.

I will say, though, that some classical economists view the period from 1965 to 1982 as one long recession, using ratios of GDP and/or Dow to gold.

 

It's a weird game....trying to decypher which is worse. This one is so new (so far!) that I've got to give it to the 80's. Imagine what we're going through now...with mortgage rates at 18% and unemployment, at best, the same (that's giving the benefit of the doubt to the number crunchers who recalculate to normalize measurement differences).

The run up has been so fast and so strong and so long. Most of the talking heads have never lived though an extended down time. The jobs and starting salaries for top qualified professionals still seem to be there (though not as much).

I don't think that recognizing we've gone through this before really deminishes the seriousness of the situation we're in now.

 

China's high unemployment rate (relatively speaking) has been a problem for a number of years (and counting), while just a year ago it seemed that high unemployment in the U.S. was nothing more than a distant memory even though the housing market had already started to crumble for months. The absolute jobless numbers in the two countries do not tell the whole story, because the shocking effect of 4.5% unemployment rate jumping to 9% in the U.S. (not that high actually, but you get the idea) is far more stunning than, say, from 10% to 12% in China.

 

GDP numbers are revised lower in a recession than initially reported often, when more accurate data is available. The 4th quarter GDP numbers won't tell the true story, until they get revised.

 

Should they be here? More and more people are calling for a temporary nationalization, wherein the banks get cleaned up then sold back into the private sector. Instead, the taxpayers are getting ripped off as TARP props up these unhealthy institutions, which, by the way, are still unhealthy even post-TARP.

As far as "other" banks, they ARE been allowed to fail and taken over by the FDIC, TARP notwithstanding. Citi and BOA are deemed "too big too fail." But this was where Japan screwed up and Sweden did the right thing- dealing with reality and getting rid of the bad banks.

"Hanke is not alone in dismissing what appears to be a potent cocktail of misinformation and doom and gloom, wherein the current recession—now in its 13th month—is already considered worse than the 16-month ones of 1973-1975 and 1980-1982."

Yeah, and if he thinks this recession will end in 3 months, he's nuts.

 

I say we don't compare until this one gets a little further along.

It's easy to compare the recessions of the 70's and 80's we monetized the debt back then. (another reason we are where we are at today)

In summary, the US must try to monetize the debt without the benefit of a gigantic credit bubble.

Good luck. (which means ain't gonna happen, at least in our lifetime)

Let's give this thing some time to gain momentum, wait another 12 months and then let's vote.

 

Robbi380 posted a good article from Barron's on the current recession in this thread: http://bbs.clutchfans.net/showthread.php?t=162687

All consumer debt is 130% of income currently. If there was a 25% correction in consumer debt, that would be $10.5 trillion, not billion. It makes the previous recessions look miniscule.

 

Interesting counterpoint from Newsweek:

http://www.newsweek.com/id/184620


We’ve Still Got Room to Spend

Those stories about a consumer debt crisis are overblown.


It's become a mantra: American consumers have been living beyond their means, borrowing promiscuously, and now the bill is coming due. Having nearly drowned in a sea of debt, U.S. consumers must now repair their finances, spend more prudently and recognize the wisdom of past generations: spend only what you earn. But while endlessly repeated by financial gurus, politicians and the media, the belief that American consumers as a whole have been living beyond their means is a myth. Wall Street was massively overextended, but on average, consumers are not.

As we now know, Wall Street financial institutions were able to borrow in excess of 30 times their capital, which meant that for every dollar they had, they could borrow more than 30. That level of debt far exceeded anything an individual consumer could take on. It's true that certain groups of individuals were allowed to take on unreasonable levels of debt—mainly speculators and lower-income people. But taken as a whole, when compared with Wall Street, individual American consumers are the soul of prudence.

Consider the hard data. At the end of 2007, consumer debt stood at $2.6 trillion, which translates to $8,500 per person. That number includes car loans, student loans and credit cards, but not mortgages. In 2003, the figure was $2 trillion, so the total amount of debt did go up during the height of the housing bubble. Mortgage debt, meanwhile, more than doubled, from just under $5 trillion in 2000 to more than $10 trillion in 2008. But during this time, rates were also stable and low, so while the absolute dollar figures of debt increased, the percentage of income that households spent to service their debts—including mortgage payments—nudged up only a small amount, from 13 percent in 2000 to 14.3 percent in early 2008. So while Wall Street was leveraged 30-1, in the middle of 2008, household net worth was $59 trillion (including homes, pensions, stocks and cash), while total debt was about $13 trillion. Even though that household net-worth figure has been sharply reduced in recent months, the debt-to-worth ratio was never even 1-1. That's how stark the contrast is between consumers and Wall Street.

OK, but what about those tens of millions of people falling behind on their credit-card payments or mortgages, people we read about daily? There again, the numbers reveal a more nuanced story. What they show is that lower-income people tend to rent their homes and have higher "financial obligations" than those who own. They spend a higher percentage of their income on shelter, which makes the national average look worse.

That belies the popular perception that a broad swath of the population was buying homes with too easy credit and too little income. The problem is that a few million were, just as millions did spend way beyond their means and have defaulted on their loans, whether because of health issues or sudden unemployment or bad decisions. But the vast middle, the 90-plus percent who are current on their mortgages, are not the ones skewing the overall statistics or creating the general impression of overextension.

The squeaky-wheel principle applies: it is the horror stories that garner the attention, not the mundane—and there are tens of millions of horror stories in a country of 300 million people. But thanks to the fiscally fit majority, the picture for Main Street is not as grim as it is for Wall Street, even with rising unemployment. More sour mortgages threaten to plunge banks into insolvency, but hundreds of millions of consumers have already been paring back their spending, paying off debt and boosting their savings at rates not seen in the history of record keeping. Once they regain some financial stability, they will undoubtedly begin consuming again, pushing the economy forward, with less giddiness, but with the prudence that most have had all along.

 

This article washes over the unprecedented amount of debt people have in their homes. As home values went up, consumers began to consider their homes as their savings, and they would borrow agains their equity. The amount of debt isn't pretty.



And how about household debt as a % of GDP?



Oh, they aren't as levered as Wall Street. Small consolation though.

 

It does actually mention that - but it claims that since interest rates were so low, people were paying basically the same net amount on higher debt:

Mortgage debt, meanwhile, more than doubled, from just under $5 trillion in 2000 to more than $10 trillion in 2008. But during this time, rates were also stable and low, so while the absolute dollar figures of debt increased, the percentage of income that households spent to service their debts—including mortgage payments—nudged up only a small amount, from 13 percent in 2000 to 14.3 percent in early 2008.

No idea how valid the numbers are though.

 

That may be true, but now both rates and debt are high. People can't refinance anymore, and a lot of them are now defaulting on debt.

 

Cheery Paul Krugman on how average wealth creation for households has stayed flat since 01:

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Rest of article...
http://www.nytimes.com/2009/02/16/opinion/16krugman.html

 

Sounds like at least two, and maybe three decades at Bernie's.

 

Krugman today... sounding glum...

 

That is a high default rate.

 

Maybe so, but there are definitely major pockets of this country that have a much higher rate... and all politics is local.

 

A legitimate worry is to what extent banks are overleveraged. If their ratio is something like 30:1, then they would hover around insolvency should 3-4% of their assets sour. In Europe, some banks hold a ridiculous 50:1 ratio.