The Great Recession Bites

The recession might be one year old already, but as anyone can see from this morning's payrolls numbers -- much worse than even the pessimists expected -- it's still getting worse, and there's certainly no end in sight. Once upon a time, this was a financial crisis; at this point, as Brad DeLong notes, we've entered a fully-fledged Great Recession.

Every time I remark to Barry Eichengreen about the disjunction between the intensity of the financial crisis and its limited transmission to the real economy, he says "just wait." I guess we can stop waiting.

The base-case scenario now has to be that things are going to get worse before they get worse. We had a long run up, and we might not see any economic growth until GDP has fallen a lot -- 5% or so. As a result, spending tens of billions of dollars on a Detroit bailout now feels increasingly like trying to catch a falling knife: my feeling is that the Zandi estimate of the cost of the bailout -- $75 billion to $125 billion -- is probably far too low. If we're going to be spending 12-figure sums, we should do so strategically, and not get rushed into it because things are urgent now. Pretty soon, a lot of other things are going to be urgent, too.

Remember that GM is warning of a couple of million job losses should it be forced into Chapter 7 liquidation -- something the government is almost certainly going to prevent one way or another. But even without those job losses, the US economy shed over half a million jobs in November alone. And the employment bloodbath is only beginning.

How do we get out of this mess? I have no idea. But I do know that anybody still hoping for a swift bounce back is looking increasingly delusional. As we saw this morning, the probability of downside surprises is much greater than the chance that we'll get any good news any time soon.