Economic Predictions For 2009

Image: Brian Rea

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Economists regard the Great Depression as something akin to the Black Death: a fascinating and terrifying historical aberration that, thankfully, can never happen again. Despite a stock market collapse and the demise of several huge financial institutions, this reassuring view of the Depression remains intact. On October 10, Lawrence Summers, the former Treasury secretary and a senior economic adviser to Barack Obama, said that “barring egregious errors, this is not going to be anything like the pictures people saw of the 1930s.” A few days later, Federal Reserve Chairman Ben Bernanke said the U.S. economy will “emerge from this period with renewed vigor.”

Among noneconomists, there is much more concern about what lies ahead. In October, a CNN poll found that 59 percent of Americans believe another 1930s-style depression is very or somewhat likely. Dismissing feel-good suggestions that the turmoil on Wall Street won’t have much impact on the rest of the economy, 55 percent of the respondents said the financial crisis would affect them personally within the next year. A separate poll for Condé Nast Portfolio shows that people working in the finance business are even gloomier: 77 percent of them say their industry is in a state of crisis, and 50 percent say the economy is the worst it has been in their careers.

So who are we to believe: the experts who failed to predict the current crisis or the great American public? With due respect to my fellow dabblers in the dismal science, I share Joe the Plumber’s queasy feeling. Unless something miraculous happens in the next few weeks, the new inhabitant of the Oval Office will inherit an economy flailing under the weight of record debts and rising unemployment. If a depression is defined as a deep, extended recession of a severity that nobody under the age of 75 can recall, then it is quite likely that we are already in one.

Despite the recent stabilization in the financial markets, which followed the agreement to inject vast sums of taxpayers’ money into many of the country’s biggest banks, deflationary forces are still ripping at the economy: There’s the housing slump, an unprecedented collapse in consumer confidence, and a global downturn that is getting more severe by the week. In addition, a reckoning in hedge funds and private equity firms is just starting, and the ripples (and potential tidal waves) of the banking crisis are just beginning to hit the rest of the U.S. economy.

Having buried their heads firmly in the sand for much of the past year, most professional economic forecasters are now predicting a moderate recession that will last until the middle of 2009—a consensus that could well prove as overly optimistic as the previous one, in which the U.S. was expected to avoid recession altogether. Even allowing for another significant stimulus package sometime in the spring, consumer spending, business investment, and exports all seem set to fall throughout most of next year, which would rule out any meaningful recovery.

In the summer of 2007, when the subprime crisis erupted, Bernanke failed to appreciate its significance. Once he realized what was at stake, he took remedial action. In the past 15 months, the Fed has cut the federal funds rate in the most rapid monetary easing on record. For months now, it has been lending hand over fist to troubled financial institutions, and in October it started lending to nonfinancial companies through the purchase of commercial paper.

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