The New Doom-and-Gloomers

My, how times have changed.

A year ago, few policymakers, "strategists," or economists, here or elsewhere, saw an economic downturn coming (even though the National Bureau of Economic Research now says that a U.S. recession actually began in December 2007).

Now, as the following Agence France-Presse report, "World Faces Total Financial Meltdown: Spain's Bank Chief," reveals, we have central bankers who sound like doom-and-gloomers (gearing up to write their own books, perhaps?).

The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faces a "total" financial meltdown unseen since the Great Depression.

"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily.

"The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.

"There is an almost total paralysis from which no-one is escaping," he said, adding that any recovery - pencilled in by optimists for the end of 2009 and the start of 2010 - could be delayed if confidence is not restored.

Ordonez recognised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze cannot be ruled out.

"This is the worst financial crisis since the Great Depression" of 1929, he added.

Ordonez said the European Central Bank, of which he is a governing council member, will cut interest rates in January if inflation expectations go much below two per cent.

"If, among other variables, we observe that inflation expectations go much below two per cent, it's logical that we will lower rates."

Regarding the dire situation in the United States, Ordonez said he backs the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.

Central banks are seeking to jumpstart movements on crucial interbank money markets that froze after the US market for high-risk, or subprime, mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid-September.

Interbank markets are a key link in the chain which provides credit to businesses and households.

Comments

[Fu]

> consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.

He should add to that...
regulators are not regulating
bank examiners are not examining
law enforcement is not enforcing
government is not governing

But at least politicians are still politicking.

[Neural forex]

Fu> regulators are not regulating
Fu> bank examiners are not examining
Fu> ...

Fu is absolutely right. Unfortunately.

[Joe M.]

Good comments above. Our debt goes up 1 million dollars every 8 seconds 24/7. This debt-berg will be defaulted on.

[Adrienne]

This is really cute to see the central bankers jumping on the doomsday bandwagon - but since THEY were the ones who engineered the entire collapse, shouldn't they have at least done us the courtesy of, oh I don't know, mentioning this earlier?

[John Kaighn]

I have to say that the doom and gloomers are a big reason why the stock market has been battered, perhaps more than it should have been. However, to say that there was no warning of recession a year ago, is just not a fact. Many economists felt a recession was possible a year ago, and I outlined this in my newsletter during the first quarter of 20078. Here is the link. Jersey Benefits Advisors Newsletter Winter 2008

John H. Kaighn

Jersey Benefits Advisors

The Kaighn Report

[Michael Panzner]

The "doom and gloomers are a big reason why the stock market has been battered"? Hmm, interesting. How about the fact that profits, especially in the financial sector, have fallen off a cliff? Or the fact that the credit spigot, the lifeblood of many businesses and the primary driver of the buyout boom, has been turned off. Or the fact that the developing world is set to experience its first economic downturn since World War II? Might these factors (and others) have something to do with the dramatic sell-off that has taken place in equity markets around the world?

Otherwise, as to whether there were warnings about impending recession a year ago from the dismal science crowd, I suppose it depends on what you mean by "many economists"?

Below is a post I wrote last December
(When the recession first began, according the the NBER):

Send in the Clowns [http://www.financialarmageddon.com/2007/12/send-in-the-clo.html]

Is it delusion or denial? Manipulation or misrepresentation? What is it about these so-called experts that they can't see the writing on the wall in terms of where the U.S. economy is headed? They missed the boat on the fallout from the housing bust and the subprime meltdown. They must have been smoking some potent dope when they came up with the idea of an economic "decoupling." And they failed to grasp that what is unfolding in the financial system is an insolvency crisis, not a liquidity problem.

In "Why Economists Are Betting a Recession Won't Happen," [http://online.wsj.com/public/article/SB119784514764832443.html] the Wall Street Journal details the latest example of pseudo-forecasting.

With the financial markets in turmoil and house prices sagging, there is a lot of talk that a recession is all but inevitable.

Yet there's a case that the economy might avoid a painful downturn. In the latest WSJ.com survey of economists, forecasters on average put the chance of a recession -- often defined as two straight quarterly declines in gross domestic product -- at 38%. That's the highest in more than three years, but the forecasters' best bet right now is that the U.S. will skirt a recession.

"A lot of the underlying resilience of the U.S. economy seems a bit unappreciated," says Citigroup economist Steven Wieting. "It's not clear that this is so large a burden that we can't muddle through this."

The Fed is on the case.

The Fed, which has cut its main target for short-term interest rates by a full percentage point since August, is expected to ease rates through the middle of next year to cushion the economy from housing and credit woes, and officials are experimenting with new tools in an effort to ease the credit crunch and encourage banks to keep lending to worthy borrowers.

The Fed's actions may have already helped. Recessions typically don't begin when rates are this low, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. The federal-funds rate, charged on overnight loans between banks, peaked at an inflation-adjusted 3% in the current cycle, far lower than the 4% peak before the 2001 recession and the 5.3% high before the 1990-91 downturn.

"We're putting a lot of faith in the Fed," Mr. LaVorgna says. "A proactive Fed and low rates to begin with are very powerful factors behind keeping us out of recession."

Strong global growth is propping up the U.S. economy.

Global economic growth is raising demand for U.S. goods, offsetting softer domestic consumption. Emerging markets, which buy more than half of U.S. exports, continue to grow, some at an accelerating pace, even as industrialized economies cool.

A weakening dollar -- in part due to the Fed's easing of interest rates -- will help carry the economy through its rough patch. It will help make U.S. exports more attractive to foreign consumers, and help U.S. producers that compete with foreign producers. Moreover, foreign companies may capitalize further on the falling dollar by investing more in the U.S. -- for example, by buying stock in American companies or setting up their own factories in the U.S.

The economy is still creating jobs, supporting incomes.

The job market is signaling a modest slowdown in hiring but not a sharp increase in layoffs. While jobs continue to bleed from the housing and finance sectors, growth in service jobs remains robust and most other sectors remain afloat.

Economists in the WSJ.com survey predict an average monthly gain of about 84,000 nonfarm jobs over the next year, which would keep incomes growing and keep consumers spending. Shoppers defied many forecasts in November, opening their wallets despite concerns about the economy. That suggests the credit crunch and housing declines haven't hit consumers as hard as some analysts expected. Outside of housing, consumers and businesses can borrow at low rates. Moreover, people with the worst credit problems -- the ones least likely to get additional credit -- aren't the biggest spenders.

The housing downturn's pain will continue, but has already done much of its damage to growth.

For much of this decade, residential construction has been a significant driver of economic growth. But since last year, when home building began to tumble, housing's contribution has dropped substantially. Now, the share of economic growth due to residential-sector investment is so low that it has little room to shave GDP further.

One of the biggest questions hanging over the economy remains: How far is the housing market from its bottom? Though many major markets are experiencing steep price declines, much of the country is OK. The S&P/Case-Shiller index, a popular measure of home prices that has shown steep price declines, has limited geographic coverage -- perhaps overstating the extent to which the housing sector's declines will weigh on consumers.

"The states that are having a hard time are where there's been a lot of speculation," says Mark Nielson, chief economist at MacroEcon Global Advisors, which sees economic growth at more than 3% through next year. "Their economies probably will not do as well as the rest of the country."

Government spending remains strong.

And then there is the government -- not just Washington but state and local governments. Spending by state and local governments is contributing 25% of GDP growth this year -- and that is before an election year when officials will resist making cutbacks. "State and local spending is kind of an unsung hero here," Mr. LaVorgna says. It tends to lag federal spending and should continue to perform well next year even if it slows in 2009, he says.

The odds of recession have risen, and the economy's skies are cloudy. But there is a chance the skies will be sunnier by the middle of next year.