Sidestepping a severe recession

Discussion in 'Economics' started by protodigm, Apr 4, 2008.

  1. I'm sure most people who do their research has had their share reading doomsday, debt deflation, housing bubble, derivative articles.

    I have seen a lot of economics articles that argue in favor of a severe recession but I haven't seen many if any articles that have a lot of meat in arguing how we would sidestep one.

    I'm sure there are a lot of bulls out there who think we have a good chance of avoiding severe recession but why? How can the debt accumulation process / consumer spending restart again? How can confidence regain in the derivatives market? How can the housing bubble deflate slow enough to avoid serious problems?

    Here are the limited arguments I've seen feel free to add:

    A common argument has been to compare our upcoming recession to that of Japan's lost decade. However there are many difference that would suggest US's version will be much lighter.

    Japan's credit crunch in the 90s was mostly internalized within the country and so the people/banks within felt the full brunt of the crunch.

    Today with the US though, the risks and therefore damage associated is greatly externalized to other markets such as Asia, Europe, Middle East etc etc so US won't take as large a share.

    Also, there is a much larger interest to keep the US afloat (even if its "wrong") than Japan due to the large vested interest the world has in the US as well as sharing the burden of the crunch.
    It is in most of the world's interest to keep the US afloat by any means. The actions by the world and the Fed might keep the US afloat long enough for some limited faith and some liquidity to be restored in the security market which would greatly mitigate the impact of the recession.

    There has been a lot of faith given to the financial world to the Fed's intervention. In the end, the main root of the problem is a confidence crisis and there is a feeling out there that "no matter how bad the shit hits the fan, the Fed will step in." It is also very likely that the Fed's actions will be followed in the near future by Europe as the ensuing credit crunch forces them to lower interest rates as well. Even though the situation is very bad, because the existing institutions have the incentive to do whatever the hell it takes to avoid the worst, it is very likely we won't. Don't fight the Fed.

    It is very unlikely any more of the big banks will suddenly go belly up like Bear Stearns barring a huge sudden drop in confidence (which is unlikely due to Fed's direct intervention). The big banks aren't that stupid, even though they are in a mess, management will do whatever it takes to get out of it and currently they have many tools at hand including the Fed and avoiding writedowns.

    Look at the financial sector right now. You have huge companies with a lot of history, global diversification, and name reputation. The stocks are currently beaten down to the pits! From a bargain hunter's perspective, it looks like the perfect time to invest in banks like Citigroup. The price is guaranteed to be higher within a few years from now barring it go completely insolvent. But really, what are the changes the Fed will let that happen?
  2. I agree with your points. I'll start buying into the "severe recession" and global meltdown scenario once we start seeing -250k NFP for a couple of months and claims coming in >500k consistently. The data we've seen so far supports the idea of an economy that has come to a standstill, but not yet of an economy that is in the midst of complete implosion (as so many would like to believe).
  3. are 'they' being polite saying 'recession' when in fact the correct
    term should be DEPRESSION