Are We In Recession?
On October 17th, the latest housing numbers added extra confirmation. New home construction hit a 17-year low in September. Housing starts fell 6.3% to a seasonally adjusted 817,000 annual rate. The lowest figure since January 1991, and single-family starts dropped 12% to 544,000. The worst showing since February 1982 in the depths of that period's severe recession. Until today called the deepest since the 1930s.
Building permits also fell 8.3% to 786,000. A 27-year low, and for single-family homes they dropped 3.8% to 532,000. The lowest in 26 years. Along with the data, the National Association of Home Builders reported that builder sentiment hit a record low in October and shows no signs of improvement. According to the University of Michigan/Reuters index (on October 17th), so did consumer sentiment. Their latest reading fell to 57.5. Its biggest every monthly drop and nearing its all-time low 51.7 figure in May 1980.
Blame it on the housing slump and assets related to it causing a severe economic contraction. According to Merrill Lynch economist David Rosenberg, it will surpass the worst of the 1973 - 1975 one. He also sees huge and growing financial damage. Credit losses already around $600 billion ballooning to two or three times that amount before things stabilize. Economist Martin Feldstein, former US National Bureau of Economic Research head, sees the deepest US recession since WW II. He told CNBC: "The fact is that lenders don't want to lend, (and) asset buyers don't want to buy assets because of this tremendous uncertainty on what mortgage-backed securities are actually worth."
Investor Warren Buffett thinks a sharp downturn is underway, but he showed up in an October 17th New York Times op-ed saying now is a good time to own stocks. So he's buying. Others disagree and say we're in much more than a cyclical slump. The result of an unsustainable house of cards. No one knowing the amount of economic damage. From rampant speculation. Mountains of debt. The housing bubble, and the entire financial unraveling affecting households, businesses, all parts of the economy, and sentiment.
Noted economist Joseph Stiglitz is grim in his outlook. He sees "the most serious problem since the Great Depression (that) in some ways (is) worse in terms of the financial institutions....The reason, in part, is that while some of the same problems that occurred (then and since), such as excessive leverage, pyramid schemes, bubbles, have happened before, the so-called innovation of Wall Street, the financial innovations, that were supposed to manage risk, created a kind of non-transparency that is now so great that no one knows exactly the magnitude of the risk they face. It is particularly bad because our financial institutions are based on trust" that you can get your money out of banks you put it into.
Because of the current unraveling, that trust is fractured. "We are in the midst of micro-economic failure on a grand scale....rather than managing risk, the financial markets created" more of it. "The failure of our financial system to do what it is supposed to do matches in destructive grandeur the macro-economic failures of the Great Depression." The "country as a whole" lost out. What happened to "the American economy was avoidable." Stiglitz sees a protracted downturn, L-shaped at best, and lasting up to 18 months before it ends.*
The economy may or may not face another Great Depression, but for many it'll feel like one. According to Yale economist Robert Shiller, it's possible. He devotes an entire chapter of his new book, EconoPower, to it. He claims that the US economy is no longer "depression proof," and lists three potential scenarios that could threaten the nation's monetary system. The third is most ominous: "a series of unexpected events that could trigger a major financial accident - a run on the dollar, a real estate crisis, a major terrorist attack, or a natural disaster, that could overwhelm the monetary authorities."
Shiller sees the current real estate crisis far from over and so severe that the Fed and Treasury will have to take emergency measures to avoid collapse. Effective tools are available. Interest rates will be cut to zero and much more. Well beyond what's already done. Great Depression-like measures will be crucial to keep the economy afloat. In his judgment, if the right ones are adopted they'll work, but not swiftly or easily.
Others aren't as sure. Last year, even the central bank for central bankers, the Bank for International Settlements (BIS), was worried. It warned that loose Fed monetary policy, speculative finance, and excess household debt, among other factors, could cause another Great Depression. It passed without notice, and here we are today. Easy credit and no oversight brought us to the edge of the abyss. The possibility of a systemic meltdown and economic calamity. The consequences are unimaginable. The human wreckage incalculable. The toll already severe and increasing.
Note:
* From The Alex Jones Show. The relevant episode can be seen on YouTube.
