[Pen-l] Dusting off the D word

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times: February 28, 2009
Sharper Downturn Clouds Obama Spending Plans
By PETER S. GOODMAN

The economy is spiraling down at an accelerating pace, threatening to 
undermine the Obama administration’s spending plans, which anticipate 
vigorous rates of growth in years to come.

A sense of disconnect between the projections by the White House and the 
grim realities of everyday American life was enhanced on Friday, as the 
Commerce Department gave a harsher assessment for the last three months 
of 2008. In place of an initial estimate that the economy contracted at 
an annualized rate of 3.8 percent — already abysmal — the government 
said that the pace of decline was actually 6.2 percent, making it the 
worst quarter since 1982.

The fortunes of the American economy have grown so alarming and the pace 
of the decline so swift that economists are now straining to describe 
where events are headed, dusting off a word that has not been invoked 
since the 1940s: depression.

Economists are not making comparisons with the Great Depression of the 
1930s, when the unemployment rate reached 25 percent. Current conditions 
are not even as poor as during the twin recessions of the 1980s, when 
unemployment exceeded 10 percent, though many experts assert this 
downturn is on track to be significantly worse.

Rather, economists are using the word depression — a subjective term 
with no academic definition — to describe a condition of broad and 
extreme economic distress that remains stubbornly in place for much 
longer than a typical downturn.

This is more than a matter of semantics. As the government determines 
its spending plans, readying another infusion of cash for troubled banks 
while contemplating an additional bailout for the auto industry, the 
magnitude of those needs will hinge on the extent of the damage.

Mark Zandi, chief economist of Moody’s Economy.com, now places the odds 
of “a mild depression” at 25 percent, up from 15 percent three months 
ago. In that view, the unemployment rate would reach 10.5 percent by the 
end of 2011 — up from 7.6 percent at the end of January — average home 
prices would fall 20 percent on top of the 27 percent they have plunged 
already, and losses in the financial system would more than triple, to 
$3.7 trillion.

Allen Sinai, chief global economist at the research firm Decision 
Economics, sees a 20 percent chance of “a depressionlike possibility,” 
up from 15 percent a week ago.

“In the housing market, the financial system and the stock market, we’re 
already there,” Mr. Sinai said. “It is a depression.”

Yet, in drawing up the budget, the White House assumed the economy would 
expand by a robust 3.2 percent in 2010, with growth accelerating to 4 
percent over the next three years.

“It’s a hope, a wing and a prayer,” Mr. Sinai said. “It’s a return to a 
sanguine view of the economy that is simply not justified.”

If, as is widely anticipated, the economy grows more slowly than the 
White House assumes, revenue will be lower, forcing the government to 
cut spending, raise taxes or run larger deficits.

Economists also criticized as unrealistically hopeful the assumptions by 
the Federal Reserve as it began so-called stress tests to gauge the 
health of the nation’s largest banks. In testimony, Ben S. Bernanke, the 
Fed chairman, said that the nation’s unemployment rate would most likely 
reach 8.8 percent next year.

“That forecast just doesn’t seem realistic,” said Dean Baker, 
co-director of the Center for Economic and Policy Research in 
Washington, “and I don’t think it helps the Fed’s credibility to make 
these sorts of forecasts right now.”

As federal regulators estimate potential losses at banks, the harshest 
assumptions they are testing entails the unemployment rate topping out 
at 10.3 percent — the highest level since 1983, but hardly the worst case.

By Mr. Baker’s reckoning, the unemployment rate may exceed 12 percent — 
the highest level since tracking began in 1948.

“We continue to see across-the-board numbers coming in worse than we 
expected,” Mr. Baker said.

By Mr. Zandi’s estimation, in the most likely case, the unemployment 
rate will reach 9.3 percent next year. The distress in the financial 
system, the job market and real estate have become inextricably intertwined.

As troubled banks remain hesitant to lend, even healthy companies are 
laying off workers. As more Americans lose jobs, they are cutting 
spending, depriving businesses of revenue, and falling behind on house, 
car and credit card payments, multiplying losses in the financial 
system. As more homes land in foreclosure and would-be buyers fail to 
secure mortgages, housing prices fall further, adding to the losses of 
the banks — a downward spiral.

Many economists expect that the labor data to be released next Friday 
will show that as many as 700,000 jobs disappeared in February, lifting 
the unemployment rate near 8 percent and pushing total job losses to 
more than four million since the recession began in December 2007.

Given the brutal forces at play, some experts question the 
administration’s decision to publicize the bank stress tests, as opposed 
to conducting them quietly.

“It invited the interpretation that this was the beginning of triage for 
the banks, that we were going to start lining them up and shooting 
them,” said Alan S. Blinder, a former vice chairman of the Federal 
Reserve and a professor at Princeton. “There are some things in the bank 
supervisor role that you just keep secret.”

Others argue that the tests could sow needed assurance. “The stress test 
could create transparency,” said Alan D. Levenson, chief economist at T. 
Rowe Price in Baltimore.

As the gruesome data accumulates, this much is already clear: 
Transparency is not for the squeamish.

Mr. Levenson noted that the weakening economy was destroying demand for 
goods and services even faster than the $787 billion stimulus program 
could replace it.


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