More than Just 'Average'

Since 1854, the average length of a U.S. recession has been 17 months from peak to trough, according to the National Bureau of Economic Research. That doesn't tell the whole story, however. Over those 15 decades, the shortest downturn lasted for seven months, while the longest, from October 1973 1873 to March 1879, was 65 months long (the Great Depression actually came in second at 43 months).

Given what got us here this time around -- including the bursting of the biggest credit and real estate bubbles in history -- and the fact that many economic indicators were already in pretty poor shape before the bottom fell out, is it realistic to assume that the current downturn will just be "average" (i.e., last only four more months)?

I don't think so. And neither does Robert Shiller, the author or the prescient bestseller Irrational Exuberance, who explains his less-than-upbeat rationale in a British Times article entitled "Leading Economist Fears Decade of Weakness in US."

The collapse of the American property market helped to start the downturn

One of the world's leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years.

Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: “We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.

“To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness.

“This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven't seen previously.”

Professor Shiller's comments come as the unemployment rate in America is rising astonishingly fast.

Last week official figures showed that the US lost 524,000 jobs in December, with the overall unemployment rate rising to 7.2 per cent — the highest level for 16 years.

With about 11.1 million people out of a job, the total number of unemployed is about 50 per cent higher than a year ago.

Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9 per cent of the workforce and that there is a high chance that it will reach at least 10 per cent.

Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve.

He said: “This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates.”

Professor Shiller, who has recently published The Subprime Solution — How Today's Global Financial Crisis Happened, and What to Do About It, also warned that plans to try to limit foreclosures had met with resistance from those who felt “they had paid their mortgages, they had done everything right, but that they are now being taxed for those who did not”.

The housing market in the United States is widely seen as one of the main causes of its economic troubles.

Spurred by low interest rates and initiatives to promote home ownership, residential real estate boomed for a decade.

Professor Shiller, who co-founded the authoritative S&P Case/Shiller home price index, was one of the first to predict that the housing market would slump and that this could bring down financial institutions.

He said: “So far the Government isn't doing much. [President-elect Barack] Obama has not made any announcement. They do not have anything going. I would have thought that Obama would be receptive [to a rescue plan to stem the rate of foreclosures].”

Comments

[Ancient Brit]

It was that 65 month recession in the 70's which left its mark on this ageing and long retired U.K. fund manager.
The F.T index fell from around 540 to a low of 148 over around two and a half years due to inflation eroding real profits and what became known as the "Secondary Bank Crisis" even though it lapped pretty close to one of the biggest at the low point. There were plenty of shares with price earnings ratios in low single digits and in many cases the net cash in many company balance sheets exceeded the market capitalisation.
Furthermore the figures were essentially honest and the company sector had not been raped yet few wanted to know.
Considering the weakened state of company, private and government finances this time round even when things looked buoyant; thanks to the merchants of debt and the desire of so many to take a quart out of a pint pot, that I suspect the present dire situation will take years to rectify.

[Steve]

I read this book a couple of years ago http://www.amazon.com/Great-Bust-Ahead-Depression-Understanding/dp/159196153X/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1231855758&sr=8-1 It describes succinctly why there will be no quick turnaround. I wrote the author at the time (he was predicting a 2011 start to the depression) and asked him if it was likely to start more like 2009 due to the very heavy load of debt being carried, and he agreed that that might be a likely scenario as well. His arguments are well reasoned and supported by facts.

[jerry]

I support the position you have taken that this is not a typical recession and could end up being worse. Just a note, you made a typo--1879 should be 1979.

http://eye-on-washington.blogspot.com

[Hector Joe Bob]

The current economic systemic predicament unfolding is like a frozen PC. It can still be useful but needs to be rebooted:

New currency accompanied with new centrally assigned asset values....most of the slaves (human resources) are still able & willing to work for their regularly deposited fiat pittance (that will be inflated until it crashes again in about 80 years) within a system that gives them enough reason to keep groundhog day going and going and going all the while the robber barrons continue to accumulate & monopolize (emphasis on Asia) the real resources and wealth of the world & even the universe, if that proves doable.

[chrisanthemama]

"...while the longest, from October 1973 to March 1879,..."

Oh noes! that's a lotta months, and they go backwards, too!

[Snappy Tom]

"Spurred by low interest rates and initiatives to promote home ownership, residential real estate boomed for a decade."

One could make the argument that with the G.I. Bill, Freddie and Fannie, the interest deduction along with depreciation, real estate has been booming in this country for far more than a mere decade.

What we've witnessed is garden variety parabolic ending to a long term expansion. Only this time it was on a scale never before seen. If it were limited to real estate we'd still be in for a doozy of a recession. However with the concomitant rise in corruption in all places great and small accompanied by the Frankenstein financial alchemy of the Fed and its henchmen on Wall Street were in for something much more serious.

I love how so many pundits act like we've been here before and that they, the clueless, think they can prognosticate the ending of what will ultimately be a systemic failure. The entire post war edifice has seen it's denouement.

It is all over but the shouting. And there'll be lots o'that!

[George]

It has to be considered that the masters behind the Fed are human and the history repeats itself... So, this time around it was the time that the young ones 20's to 30's to learn what it means bad economy and that the video games will not help.
It is with great sadness that Fed will laugh all the way to their bank accounts and will start soon to do the same thing again...

[Eric]

In the Great Recession of the 1970's we, the baby boomer generation, bailed out the nation's economy. Say what you want about us now -- Monday-morning quarterbacking isn't necessarily good hindsight -- but the boomer generation insisted on equal rights for women, African Americans, Native Americans and also insisted on environmentalism. It's oh so easy to take all that for granted now that it's mainstream but trust me -- it was anything but mainstream in the '70s!

So now it's the turn of the next generation to step up, step out of the comfort zone and demand change. Those in positions of power who have become hide-bound and immovable need to be moved aside. Stop voting for the same old crusty corrupt politicians you see on TV. They are the problem. If you don't care enough to be bothered then that will be abundantly reflected in your quality of life in the very near future.

[Unsympathetic]

The downturn of 1873 was the last one to originate in the extension of bad housing loans - at that time, to Central Europe - so the comparison is very apt.

At that time, the US was the manufacturer just coming online located across the ocean from the consumers who spend the most.

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18