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The D-word: Will recession become something worse?

2009-03-03 08:09:27

By TOM RAUM and DANIEL WAGNER, Associated Press Writers

WASHINGTON A Depression doesn't have to be Great bread lines, rampant

unemployment, a wipeout in the stock market. The economy can sink into a milder

depression, the kind spelled with a lowercase "d."

And it may be happening now.

The trouble is, unlike recessions, which are easy to define, there are no firm

rules for what makes a depression. Everyone at least seems to agree there

hasn't been one since the epic hardship of the 1930s.

But with each new hard-times headline, most recently an alarming economic

contraction of 6.2 percent in the fourth quarter, it seems more likely that the

next depression is on its way.

"We're probably in a depression now. But it's not going to be acknowledged

until years go by. Because you have to see it behind you," said Peter Morici, a

business professor at the University of Maryland.

No one disputes that the current economic downturn qualifies as a recession.

Recessions have two handy definitions, both in effect now two straight

quarters of economic contraction, or when the National Bureau of Economic

Research makes the call.

Declaring a depression is much trickier.

By one definition, it's a downturn of three years or more with a 10 percent

drop in economic output and unemployment above 10 percent. The current downturn

doesn't qualify yet: 15 months old and 7.6 percent unemployment. But both

unemployment and the 6.2 percent contraction for late last year could easily

worsen.

Another definition says a depression is a sustained recession during which the

populace has to dispose of tangible assets to pay for everyday living. For some

families, that's happening now.

Morici says a depression is a recession that "does not self-correct" because of

fundamental structural problems in the economy, such as broken banks or a huge

trade deficit.

Or maybe a depression is whatever corporate America says it is. Tony James,

president of private equity firm Blackstone, called this downturn a depression

during an earnings conference call last week.

The Great Depression retains the heavyweight crown. Unemployment peaked at more

than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock

market lost 90 percent of its value from boom to bust.

And while last year in the stock market was the worst since 1931, the Dow Jones

industrials would have to fall about 5,000 more points to approach what

happened in the Depression.

Few economists expect this downturn will be the sequel. But nobody knows for

sure, and nobody can say when or whether the downturn may deepen from a

recession to a depression.

In his prime-time address to Congress last week, President Barack Obama

acknowledged "difficult and trying times" but sought to rally the nation with

an upbeat vow that "we will rebuild, we will recover."

The next day, Federal Reserve Chairman Ben Bernanke told the House Financial

Services Committee that the "recession is serious, financial conditions remain

difficult." He held out a best-case hope that it might end later this year,

with "full recovery" in two to three years.

Despite the tempered optimism, the economic outlook remains grim. Consumer

confidence has fallen off the table, stocks are at 12-year lows, layoffs come

by the tens of thousands, and credit remains tight.

The current downturn has many of the 1930s characteristics, including being

primed by big stock market and real estate booms that turned to busts, said

Allen Sinai, founder of Boston-area consulting firm Decision Economics.

Policymakers and economists note there are safeguards in place that weren't

there in the 1930s: deposit insurance, unemployment insurance and an ability by

the government to hurl trillions of dollars at the problem, even if it means

printing money.

Before the 1930s, any serious economic downturn was called a depression. The

term "recession" didn't come into common use until "depression" became burdened

by memories of the 1930s, said Robert McElvaine, a history professor at

Millsaps College in Jackson, Miss.

"When the economy collapsed again in 1937, they didn't want to call that a new

depression, and that's when recession was first used," he said. "People also

use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"

Most postwar U.S. recessions have come after the Fed has increased interest

rates to cool down rapid economic growth and inflation. Later, the Fed lowers

rates and helps restart the economy, with the housing and auto sectors both

sensitive to interest rates leading the way.

This time is different: As Senate Banking Committee Chairman Chris Dodd,

D-Conn., said, "Our housing and auto sectors are leading us not out of

recession, but into it."

What's more, the Fed no longer has the ability to kick-start recovery by

lowering interest rates. The central bank has already effectively lowered the

short-term rates it controls to zero.

And there are no guarantees the massive economic stimulus package and series of

bank bailouts will stave off a nightmare recession, or worse.

"It is certainly plausible that the kinds of policy measures that have been

good enough to tame the business cycle are no longer adequate in a fast-moving,

highly leveraged, highly networked economy," said Anirvan Banerji of the

Economic Cycle Research Institute.

Today's economic indicators don't project a depression. But Banerji is

cautious. Economic data in 1929 didn't show that the stock market crash was

about to lead to years of economic misery, either.

"It did not look like the kind of plunge that would be a depression until after

the recession began," Banerji said. "The Great Depression didn't start out as a

depression. It started out as a recession."

The depression that consumed most of the 1870s and followed something called

the Panic of 1873 makes a better comparison to what's happening now, said Scott

Nelson, a history professor at the College of William and Mary.

Financial markets had become centrally located by the 1870s, notably in London.

And nations had not yet enacted the protectionist trade policies that were in

place by the 1930s.

The results were not exactly promising. Gangs of orphans roamed city streets as

men moved west to pursue cattle industry jobs. Widows struggled to make money

by serving unlicensed liquor. Thousands of workers, many Civil War veterans,

became transients.

The downturn lasted more than five years, according to the economic research

bureau four times as long as what the United States has endured so far in

this downturn.

Today's recession is already longer than all but two of the downturns since

World War II. But for now, public officials are being extremely cautious about

the D-word. Alfred Kahn, a top economic adviser to President Carter, learned

that lesson in 1978 when he warned that rampaging inflation might lead to a

recession or even "deep depression."

When presidential aides asked him to use another term, Kahn promised he'd come

up with something completely different.

"We're in danger," he said, "of having the worst banana in 45 years."