How long will the recession last?

[e1618978]

I think that we will be in and out of recession every year or two for the next decade, for the following reasons:

- whenever we start to come out of recession, interest rates will have to go up to fight inflation caused by the massive government spending right now, which will trigger problems for the home sales market, the corporate bond market, and the defect.

- whenever we start to come out of recession, oil and other commodities will skyrocket in price. We will shoot to $200/barrel oil and hit another oil shock, sending us back into recession.

- the federal reserve has purchased a ton of stuff, corporate bonds, treasuries, etc. When they try to sell these balance sheet items, it will remove liquidity from the credit markets and make it harder to lend (i.e. the sales from the fed balance sheet will be competing with treasury and corporate bond sales). This could make interest rates even higher than they would normally be, causing the Fed to take an even bigger loss on fixed interest rate items that they bought.

- the economy was running hot because everybody was running on margin (businesses started via credit cards, 40-1 leverage in banks, etc). We won't be able to return to "normal" after this recession, because the savings rates will be permanently higher, and banks will be much more heavily regulated.

There are also one time risks, bad things that will happen that have not happened yet:

- Massive defaults on Eastern European debt if the price of oil stays low, likely to take out most of the Western European banking industry, because those banks hold a couple trillion dollars in Eastern European government loans.

- Chrysler liquidation if 363 sale does not work, GM and Chrysler still have a risk of returning to chapter 11 or even 7 in six months or a year after the current go through if auto sales to not rebound.

- If you count the SS and Medicare future debt commitments, our debt to GDP ratio is very high (anyone know what it is? I heard that it is over 300% if you count everything).

... any thoughts? I just don't believe these "Green Shoots" things in the media.

[FloorJack]

I was thinking that we were at the bottom of the bad but now I'm not so sure. Obama's plan to buy "illiquid" assets is not taking off. Home sales/values/starts/finishes seem to be doing what they should be doing which is good. Car makers are headed to chapter 11 where they should have been along (ie auto bailout only extend problem instead of making it better) which good and bad. Consumer confidence and spending is up. Stock are going up and not down but no rally. Stress tests seem to have gone well. Bond holders seem be fearing inflation which is not good.

I would call that all mixed. Maybe another 12 months. When the final analysis is out we may see that it ended now?

[e1618978]

Consumer confidence is up, true, but is spending up? I need evidence of that before I believe it. Consumer confidence is a shell game - put enough "green shoots" stories out there, and the stock market rebounds. Once the stock market rebounds it makes people feel better, but it is all based on propaganda IMHO.

Stress tests were a joke, IMHO - I think that the banks will have to raise capital again in the fall.

[involuntary_serf]

I predict a few years of basic stagnation. Not quite "depression" but more than "recession" (these are imprecise and somewhat subjective terms anyway). Looking at something like a mix of the Great Depression (the similarities in political, fiscal and monetary actions are frighteningly similar) and Japan of the 90's. All this with a couple of wild swings thrown in as the Fed pulls of all the levers at its disposal and whips the economy in one direction or another. My worst fear is runaway inflation. Currently a significant amount of inflation has been "baked into the cake". This money can be "mopped up" but not without some severe consequences.

The fact is we'd probably already be in the early stages of recovery if the actions taken over the past 7-9 months (Obama and Bush, President and Congress, Democrats and Republicans, Geitner and Paulson) had not been almost exactly the opposite of what should have been done.

That we're doing as well as we are is probably a testimony of the resilience of what's left of the American free-market economy and the American people in general in the fact of utter incompetence from a policy-making perspective.

Obama's specific actions with the car companies, the banks and AIG have got to have anyone with any brains terribly nervous about anything he casts a glance at.

[involuntary_serf]

Consumer confidence is up, true, but is spending up? I need evidence of that before I believe it. Consumer confidence is a shell game - put enough "green shoots" stories out there, and the stock market rebounds. Once the stock market rebounds it makes people feel better, but it is all based on propaganda IMHO.

This is true. The stock market doesn't know what the fuck to do. It's all over the place. The so-called "green shoots" are more or less people trying to find the least worst news. Shit, when the Fed Chairman comes out smiling and says things are getting bad as fast, you know there are problems.

[e1618978]

The fact is we'd probably already be in the early stages of recovery if the actions taken over the past 7-9 months (Obama and Bush, President and Congress, Democrats and Republicans, Geitner and Paulson) had not been almost exactly the opposite of what should have been done.

I agree - what they should have done is the following (in October of last year):

AIG - chapter 7 bankruptcy, wipe out preferred and common stock, sell the insurance business via IPO, debt and CDS holders get to divvy up the sale proceeds.

FNM, FRE - well, they did the right thing there. There was an implied government guarantee, and the government encouraged people to buy the bonds, so they had an ethical need to make sure that the bondholders stayed whole.

The rest of the S&P 500 - they should have put a stake in the ground saying "All preferred stock and bonds gets converted to common stock at today's prices at the market open tomorrow". Think of how the US could be dominating right now if none of our companies had any debt...

[jazzguru]

I often wonder how different things would be if the government gave this so-called "stimulus" money directly to the people.

There are approximately 250 Million adults living in the U.S. How much money are these bailouts worth in total? $1.6 trillion? I think it's more--for this example let's go with $2 trillion.

$2,000,000,000,000 / 250,000,000 adults = $8,000 per adult

People could use the money to pay off consumer debt, get current on their house payments, and of course, go out and buy things to stimulate the economy!

The problem is, we'd still have a huge deficit to deal with and eventually have to deal with higher taxes, anyway.

Here's a thought: tax cuts.