Are We Heading Into an Economic Depression?

September 16 2008 / by Alvis Brigis
Category: Economics   Year: 2008   Rating: 3

Pundits and bloggers are once again throwing around words like “crisis” and “depression” in reaction to yesterday’s core stock market meltdown that included the largest bankruptcy in world history – Lehman Brothers, the unexpected bargain priced sale of stalwart Merill Lynch to Bank of America, and a near collapse of AIG , the nation’s largest insurer. To top it all off, a Fed report detailing falling U.S. industrial production levels has sent shivers spidering through all sectors and global markets.

The truly worrying part is that this hiccup is not related to high oil prices, which have fallen off considerably in the past month, but instead the ongoing home mortgage collapse which some predict will cost us in the $1,000,000,000,000 (IMF estimate) to $2,000,000,000,000 (Goldman Sachs) range. This confirms that we are deeply vulnerable in at least two separate yet critical areas, making any subsequent surprises all the more worrisome for fear of a chain reaction or even a fourth turning.

The Trillion Dollar Question: Just how bad is this going to get?

According to the big-wigs, the situation is ugly but not entirely hopeless:

Presidential candidate Barack Obama says, “I don’t think that we’re … necessarily going in the direction of the Depression. ... There are some similarities, though, to what happened back in the late 20s and early 30s and what’s been happening now, and the biggest similarity is how we’ve been dealing with Wall Street and what’s happening in the financial markets.” – Reuters

U.S. Treasury Secretary Henry Paulson acknowledges that we’re going through a difficult time and that housing is “at the root” of the troubles but that we’ll get past those “in months as opposed to years.” – Bloomberg

But he also admits that “We have an archaic financial regulatory structure [that] really needs to be rebuilt ”, which evokes the fourth turning specter.

Former Fed Chairman Alan Greenspan, seems to concur with the notion of a period of deep shift:

“This is a once in a half century, probably once in a century type of event. We shouldn’t try to protect every single institution. The ordinary cost of financial change has winners and losers.” – Bloomberg

This, of course, has some business writers making comparisons to the Great Depression. and some Nobel laureates agreeing that it will be bad, but not quite as bad as 1929.

But enough of what they think. What do you think?

Just how bad will this economic downturn get?

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Comment Thread (4 Responses)

  1. I always knew the housing bubble would burst and I am not sure we have seen the worst of it, but I doubt we are headed for a depression. I think there is too much of a world market interest in the US economy staying afloat. Also, I think the cleantech boom will offset things a little bit.

    Posted by: obsolescence   September 16, 2008
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  2. I think it will be a serious recession at worst. It’s the natural hangover from years of living beyond our means, and even worse, dumb-ass sub-prime lending by banks. It’s the same greed which leads to the boom-bust cycles we’re all familiar with.

    It’s a shame that politicians and financiers are so imcompetent/greedy/whatever, but in the medium to long term, our standard of living improves, due to the same increases in productivity and tech advances that even the Great Depression couldn’t stop. We live like Kings and Queens compared with our own Grandparents.

    Posted by: CptSunbeam   September 16, 2008
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  3. @ obsolescence – I generally agree that the world system is incented to keep the U.S. afloat. I just think that instability, especially re: oil, unemployment and low output, in addition to the housing bubble could bring us to a point where other countries are tempted to unload their US securities and other investments. It’s unlikely, but if a domino effect begins it’ll be historically catastrophic. Crossing fingers, hoping accelerating change will generate more value sooner. :)

    @ CptSunbeam – The fourth turning generational cycle trumps shorter term economic cycles and it’s just about due. Hopefully accelerating change can trump that cycle.

    Posted by: Alvis Brigis   September 16, 2008
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  4. I teach Economics. I can say that given the givens; especially with the shakiness on Wall Street we are very close to if not already in the first economic Depression we have been in since the Great Depression. Economic depressions are usually classified by an unemployment rate of 6% or higher. At the end of August we were sitting at 5.8% Unemployment, also another characteristic of an economic depression is failing markets (hello Wall St. Crash!) and a fall in GDP. So folks at this point we are 2 of 3. We shall see if this depression stays under the Great Depression’s legacy or if it tops it. Batton down the hatches matyes it is gonna be a hell of a bumpy ride!!!

    Posted by: lwall   October 01, 2008
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