I keep hearing how the current recession will end in 2010 because the average United States recession from 1854 to 2001 has been 17 months. This is silly for a variety of reasons.
One reason is that there is no average recession. Post-World War II recessions have lasted from a minimum of six months to a maximum of only 16 months. If we were to apply the “average recession” logic to post World War II recessions, the current recession, which the NBER — the National Bureau of Economic Research — says started December 2007, would have ended 10 months later, last October.
Another reason is that few previous recessions have been accompanied by the financial sector collapse that we witnessed in September. Worldwide experience indicates that recessions associated with financial sector panics tend to be longer than those without panics.
Since 1854, five United States recessions have been accompanied by financial panics. These are the recessions of 1857, 1873, 1893, 1907, and 1929. The average duration of these recessions was 31 months. The 1907 recession was the shortest, at only 13 months. The 1873 recession was the longest, at 65 months. For comparison, the 1929 recession was 43 months. Interestingly enough, J.P. Morgan was instrumental in ending the financial panics of the two shortest recessions, 1893 and 1907.
If we were to engage in the same sort of fuzzy thinking as the “average recession” analysis applied to “financial Panic” recessions, and assuming we use the NBER recession start date of December ‘07, the current recession could be expected to end 31 months later in July 2010. Is that too long for you? You could use the average 20th Century recession accompanied by a financial panic length. That is 28 months, so maybe the recession will end in April 2010.
Maybe we should look at foreign data? The point is that if you play this game long enough, you can find a date you like.
Finally, the method of dating recessions changed with the 2001 recession. The new method is much more likely to declare an economy in recession. If the old method had been used — if previous criteria were applied to the current situation — I believe the recession would have commenced no sooner than July 2008. Recent data revisions increase my confidence that the NBER was wrong when they said the recession commenced in December 2007. If you have the wrong start date, any “average recession” method will be wrong.
The facts are that we have a serious recession accompanied by a financial panic and continuing massive job losses. The correct way to analyze the current recession is to recognize that it was accompanied by financial panic, and that means we had a regime shift from a good equilibrium to a bad equilibrium.
Game theory tells us that we can have multiple Nash Equilibria to certain games. A Nash Equilibrium is one where knowing your opponent’s decision you would not change your decision.
Bank runs provide an excellent example. Suppose you have a bank that does not have deposit insurance. Most of the time things plug along. People make deposits, borrow, and the like. Everybody is happy with their decisions. Call this the good equilibrium. However, in the event of a bank run, everyone wants to participate in the run, because those who do not end up loosing. Call this the bad equilibrium. Furthermore, nothing real has to change. We can switch from the good equilibrium to the bad equilibrium on unfounded rumors.
The financial panic we witnessed last September was exactly like a bank run. In an amazingly short time, we switched from a good equilibrium to a bad equilibrium. The bad news is that we have no idea how to switch from a bad equilibrium to a good equilibrium. It will surely happen, but we don’t know how to cause it. We don’t know what will cause it. We can’t predict when it will happen.
We do know that a lot of assets need to change hands. These include financial assets, auto factories, and homes. Recessions are periods when assets are reallocated to better uses.
Current policy, with its obsessive pursuit of bailouts, seems to be focused on delaying those reallocations. That will delay the recovery. So-proposed government efforts to limit the impact will be ineffective, if not counterproductive. That is why I don’t see any reason to expect a recovery in 2009.
Bill Watkins, Ph.D. is the Executive Director of the Economic Forecast Project at the University of California, Santa Barbara. He is also a former economist at the Board of Governors of the Federal Reserve System in Washington D.C. in the Monetary Affairs Division. All recession dating data in this article is from the NBER website.
Comments
6 responses to “The Recession: Fuzzy Thinking Delays A Recovery”
Thanks for writing Bill Watkins.
What do you think the federal government and state governments should be doing dealing with the financial crisis? Do you have ideas dealing with taxes and other things? What do you think our country should do to reduce the probability of capital flight? What do you think our country should do to reduce the probability that people will lose jobs in the private sector?
Are there any articles or websites you think people should check out?
Do you think Congress should eliminate the Federal Reserve or veto many of its decisions? What do you think the Federal Reserve should be doing differently? Do you think the Federal Reserve is being stupid and if so how?
I discuss dealing with the financial crisis on my profile http://www.newgeography.com/users/kenstremsky. It has links to many articles.
I recommend people read
“The Joys of Hyperinflation” by Gary Gibson
http://www.whiskeyandgunpowder.com/the-joys-of-hyperinflation/
Sincerely,
Ken Stremsky
Many observers are pessimistic about the economy because they believe a vicious downward cycle has taken hold, where less spending leads to fewer jobs, which reduces purchasing power, leading to even more job losses. Many just can’t see how this vicious cycle will stop. As of now, the question on everyone’s mind is that, when this recession will end? Skyrocketing food cost and tuition fees are taking toll on their budget. For many, getting student loans is the key in order to pay their tuition and miscellaneous fees. Student loans are a valuable tool for people to get an education. However, it can seriously add to your burden, and are a leading cause of people needing debt relief or looking into bankruptcy. Discharging student loans under bankruptcy is difficult; to do so would require meeting the hardship standard. If they figure into a bankruptcy, most likely the filing would be under Chapter 13, and student loan repayment would be continued. It would also be better to use a payday loan if you come up short on a payment than letting it slip or using a credit card. Also, a great thing to do is to get debt consolidation of your student loans right away.
I agree that we shouldn’t wait for these 17 months will gone and do nothing to improve situation. Every crisis has its own features. We must investigate them and find ways of output.
Wikipedia says about it the following: According to economists, since 1854, the U.S. has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more, and four periods considered recessions:
* July 1981-November 1982: 14 months
* July 1990-March 1991: 8 months
* March 2001-November 2001: 8 months
* December 2007-July 2009: 19 months
The 2008/2009 recession is seeing private consumption fall for the first time in nearly 20 years. This indicates the depth and severity of the current recession. With consumer confidence so low, recovery will take a long time. Consumers in the U.S. have been hard hit by the current recession, with the value of their houses dropping and their pension savings decimated on the stock market. Not only have consumers watched their wealth being eroded – they are now fearing for their jobs as unemployment rises.
For not push people in debts and not to compel to get paycheck advance our brains on the apex of power should work hardly.
I don’t think any recessions in the past are similar with this recession. Each one had it’s own identity because each one was caused by different reasons and had different resources for recovery. If we want to be wise about this recession, we should start thinking about spending more, this way money will keep circulating, people would afford to pay loans and to make loans, buy houses, sell houses and things would easily shape a different trend. Spending is the ultimate solution, this is how I see it, I’ve even had a payday loan just for that.
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