It's Going To Get Ugly

by hilzoy

Nouriel Roubini, sunny as ever:

"Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, driving the stock market lower after it rallied the most in seven decades yesterday.

"There are significant downside risks still to the market and the economy," Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. "We're going to be surprised by the severity of the recession and the severity of the financial losses."

The economist said the recession will last 18 to 24 months, pushing unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs. (...)

Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be "closer to $3 trillion," up from his previous estimate of $1 trillion to $2 trillion. The International Monetary Fund estimated $1.4 trillion on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg."

Back in my junior year of college, as I watched all the seniors writing their (mandatory) senior theses, I had a horrible thought. Like most people, my friends and I had had various crises in the course of which we asked a lot more of our friends than usual, and required a lot more generosity and indulgence. It suddenly hit me that while in the past all our crises had occurred separately, allowing everyone else to pitch in for the one or two people who were having trouble, during the spring semester of our senior year we were all going to have crises at the same time. (Writing a senior thesis is a crisis almost by definition.) Everyone would need more help than usual, and no one would be in a position to give it.

That was, unfortunately, how it played out. But it helped that I had seen it coming: I tried to scale back the demands I made on other people, and to use those moments when I had emotional resources to spare.

I mention this because recessions are like that, but on a national or global scale. Almost everyone needs help, and many fewer people than usual are in a position to give it. Not just material help, either: those of you who haven't lived through a serious recession might not know just how much of a strain it is when everyone is hurting, no one can count on making it financially, nothing the country tries seems to work, businesses are shuttered, neighborhoods go dead, and couples all over the country stare at one another over piles of bills, wondering how on earth they're going to manage.

And it lasts for years.

I think it's going to get really ugly, in ways we haven't seen for decades. It's always a good time to try to be generous and decent, but never more so than when times are tough all around.

Comments

[Andrew]

That's a heartwarming sentiment, hilzoy, and I couldn't agree more.

My concern for this deepening recession is that social structures in America, particularly urban and suburban areas, has diminished greatly since the last economic crisis. People simply aren't as connected as they once were.

Most people I know no longer even live within 100 miles of there primary support network (i.e. close family). Urban flight and a labor force which has been forced into being highly mobile has gone a long way towards fracturing our social networks.

Politics seems to have gone out of its way to drive the wedge deeper, playing on people's prejudice and fear, so that I am leery that many Americans will turn on one another and finger point. Let me be clear that I am not suggesting we will have mass riots and civil war, but I do believe the potential for a number of disparate acts of ugliness is looming.

[Gary Farber]

"People simply aren't as connected as they once were."

I have found that the internet can make for many new connections, and renewing old ones, with many kind people.

[tomeck]

People can always help, though the help offered may not be enough. The spiritual and emotional will be as important as the financial. Read "Hard Times" by Studs Terkel. We've been through worse than this, we'll make it through.

[wonkie]

Well as usual I worry about the animals. People won't have extra money to donate to charities. How is my all volunteer dog rescue kennel going to make it through this? There are sixty dogs down there now dependent upon the kindness of strangers. And there will be even more homeless pets as times get harder for people.

When I buy for the foode bank I always buy dog and cat food. People laugh but I'm not buying the food for people. many many low income people are elderly and/or disabled, housebouund and lonely with only a cherished pet to keep them connected to life.

Each year the Olympia newspaper publishes wish lists from low income people so that those who are a little better off can buy for a stranger in need. It is heartbreaking to read the wish lists because the majority of the wishes are for the welfare of pets: kitty litter, a dog blanket, help with a vet bill. So please when the shit hits the fan remember that people need support for their animals as well as themseles.

[Megan]

Being generous and decent may be a good way to help yourself as well. It moves your thought away from what could happen to you.

[matttbastard]

More sunshine and lollipops from Roubini in Wednesday's Globe and Mail:
"Yes, Chicken Little, the sky really is falling".

[DaveinHackensack]

The worst recession in forty years? I don't see that happening this year or next. We'll have a recession alright -- the business cycle hasn't been repealed -- but interest rates are low, gas prices have been dropping like a rock, the real economy (outside of housing) has been strong, and the government has been dealing aggressively with the problems in the financial sector. We'll probably see a much worse recession in 5 or 10 years, when all this pump-priming leads to soaring inflation and interest rates and oil and other commodity prices spike back up as well. It could be like the late 1970s again.

[now_what]

interest rates are low

Shipments are sitting in ports because letters of credit are unavailable at any rate. GMAC just said it won't loan money to people with credit scores below 700 (50% of people are below 720). Businesses are putting off expansion plans because they can not get financing at any interest rate. Credit card companies are reducing the credit lines available to consumers and banks are closing home equity lines of credit. The LIBOR rate has skyrocketed meaning adjustable rate mortgage payments are going to skyrocket.

Interest rates are low? Yes, there is tremendous demand for short term Treasuries. This is not a good thing. It means people are terrified. Saying interest rates are low when businesses simply can't get loans isn't reassuring.

gas prices have been dropping like a rock

Why? Because of massive production increases? Because of the sudden development of alternatives to petroleum? Or because of demand destruction due to a recession?

Hint to the contestants, it's behind door #3.

the real economy (outside of housing) has been strong

Retail sales have been falling for months, we've had 9 consecutive months of job losses. That's not what a strong economy looks like. That's called a recession.

the government has been dealing aggressively with the problems in the financial sector

Too little too late. The time to deal aggressively with the problems was before the worst financial crisis since the Great Depression was in full effect. This was not a surprise. People knew this was coming. Doing something about it ahead of time conflicted with a certain ideology.

Worst recession in 40 years? Maybe. It's already going to be as bad as the Reagan recessions. Those were bad enough that most people who know about them don't want to see what worse ones look like.

[Davinci]

Off topic but it is over ... Bird tosses the towel...

http://theforvm.org/diary/bird-dog/electoral-post-mortem-advance

[Gary Farber]

"Off topic but it is over ... Bird tosses the towel..."

Charles sounds more or less reasonably sane, doesn't he? And extremely so in comparison to the folks at Redstate, the Corner, etc.

['Stute Fish]

I suddenly have a strong guess as to where you went for undergrad. Hi, we are everywhere.

Also, great post. My family and I have been sitting and watching the recession looming like it's not going to happen to us - and it hasn't, yet - and we're cushioned enough that it might not ever touch us directly. But all the more reason to give more of ourselves to those who are affected.