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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."