Monday, October 20, 2008

US faces recession, Bernanke's stimulus

I don't want to start off this week's posts with the usual comparisons of our current economic climate to the Great Depression, but we do have some news out acknowledging the onset of a notable US recession.

From FT, "US faces worst recession in 26 years":

"The US economy appears to be plunging into what many experts believe will be its worst recession since 1982.

Senior officials at the Treasury and Federal Reserve are confident that the rescue plan for US banks will succeed in preventing a financial system meltdown and ensure there will not be a repeat of the Great Depression. But they know that a sharp economic downturn is already baked in the cake. They do not,however, know how deep or protracted it will be.

The focus of concern is shifting from the markets – although these remain dangerously stressed – to the wider economy, where the consumer finally appears to be cracking.

The Fed and Treasury were expecting the economy to weaken but not as rapidly as it has, with collapsing consumer confidence, falling home starts, slumping retail sales and falling industrial production."

There are worries of an upcoming jump in the unemployment rate (which makes sense when you read about all the recent job cuts and firings from New York to Silicon Valley), and this in turn has led to worries over (gasp!) decreased spending and increased saving by ordinary Americans (now known as "consumers").

Of course, this spells doom for our consumption and debt-driven economy. Bloomberg has the details in, "Turmoil may make Americans savers, worsening 'nasty' recession":

"The U.S. may be on its way to becoming a nation of savers, whether Americans like it or not.

With home and stock prices declining and credit hard to come by, consumers who have fallen out of the savings habit are being forced to curb borrowing and rein in spending.

That is bad news for companies catering to them, which will have to retrench as well. Detroit automakers may need to slash costs and merge as Americans hold onto their cars longer. Shopping malls might be forced to shut as retail traffic trails off. Hotels may have to shelve expansion plans as vacationers become stingier with their dollars.

The big concern is that households, spooked by the turmoil in financial markets, will cut back rapidly and sharply, plunging companies into bankruptcy and deepening a recession that many economists say has already begun."

It seems all the bailouts and government stimulus packages (paid for by current and future generations of Americans, along with help from our foreign creditors) that have been conjured up to date were not enough to prevent our having to face economic reality.

But wait! What if we come up with another new "stimulus package" to spur the economy? Maybe this one will really do the trick to get us out this "protracted slowdown" Ben Bernanke is talking about.

But don't worry; despite the job losses, slowing economy, and falling asset prices across the board, technically this isn't even a recession:

"...Bernanke, who with Treasury Secretary Henry Paulson has led the government's extraordinary efforts in recent weeks to stem the financial crisis, was asked by Rep. Rosa DeLauro, D-Conn., whether the economy is in a recession.

"We are in a serious slowdown," Bernanke said, refusing to give the yes-or-no answer DeLauro said she wanted.

He said "recession" is a technical description of economic conditions. "Whether it's called a recession or not is of no consequence," Bernanke said."

So there you go. The government spends hundreds of billions of dollars to ward off what they can not or will not define.


Avatar said...

Bailout this Bailout that...Where does the money come from in the so called global financial crisis. Have you looked into who owns the U.S. debt?

David said...

Hi Avatar,

You raise some good questions, and I see you've addressed the issue of US debt holdings in your latest post.

I think that other good sources of info/opinion on this topic are:

1. "Where is Paulson going to get $700 billion for his bailout plan?" - Contrarian Investors Journal.

2. "The Party is Over" - Peter Schiff.

3. "Jim Rogers speaks with Bloomberg TV" - Finance Trends.

Andy said...

the government has got so many initiatives on hand with a seemingly myopic view that I question how many of these programs will actually work. For example an earlier direct to consumer $50 billion stimulus package, provided a lift to consumer spending of 0.4 percent in May, but dried up after that. Similarly the 2008 housing relief bill did not save the housing market or GSE's - Freddie and Fannie. Despite being politically popular, both examples of fiscal action failed miserably. With the floodgates of government spending opened, it is likely that our financial chiefs and lawmakers will keep on coming back for more.

David said...

Hi Andy,

Yes, there are so many initiatives and backstops/bailouts taking place it's hard to remember or keep track of them all.

When the money to fund these programs is taken forcibily from taxpayers and future generations, or borrowed/printed out of thin air, it's easy to go wild and spend money at the drop of a hat.

We'll see how it all works out. One thing to remember is that even if some programs are shown to work by virtue of some measurable yardstick or statistic, there are always unseen effects/consequences of any intervention. These usually go undetected by the majority and are therefore rarely discussed.

bmbull said...

You think it's bad now? Wait until they actually admit there's a recession in progress. Or unemployment sneaks up to 8 percent or so.

That's the amazing part of all this. We're already talking about a second 'stimulus' package, and the gov't hasn't even admitted a recession yet, and their own unemployment stats are around 6 percent.

David said...


Yes, I think that this may be the most unbelievable feature of this whole series of government interventions and money injections/stimulus programs.

As many others have noted, in order to promote these various programs, Paulson and Bernanke have repeatedly invoked the fear of financial catastrophe and depression.

And yet, when asked about the recession, Bernanke refuses to acknowledge it by its true name!