Regarding the Length of the Current Recession

Last night I was watching Happy Hour on the Fox Business network. This is basically my favorite channel these days, and I like and respect the principal members of the show. The best segment of the show involved predictions regarding the length of the recession.

In short, the average duration of the last four recessions is 18 months. Since we have been in this present recession for 11 months now, we are supposed to get out of this mess by June or July of 2009. This fits snugly with the optimistic and popular prediction that growth will return in the second half of 2009.

With all due respect, I non-concur. The epicenter of the chaos is extremely important. The center of this quake is the financial sector of the economy. We have had only one previous recession where the lead-decliner was the financial sector. That is the Great Depression. By the most limited and conservative estimates, the Great Depression lasted 43 months from 1929 to 1932. Many will tell you that the FDR administration never actually reignited the private economy. Many will tell you that it was WWII that ended the Great Depression. WWII did not officially get underway (in these United States) until Dec 7th of 1941. We had a Bear market that went from 1932 to 1941.

More recently, Japan had a lost decade in the 1990s where limited or no growth took place. The reason was a housing and mortgage bubble much like our own. Japanese banks were notorious for their denials of their default rates. They would not declare defaults, even when faced with the worst performing loans. Although this is happening in some cases I personally know of, U.S. law largely forces Mortgage companies to write-down poor performers and take their losses early. For this reason, we are supposed to get out of jail quicker than the Japanese did.

How much quicker? HSBC economists recently released forecasts of the recession's length to their partners and friends. According to HSBC, the U.S. will be in recession for 5 years. The recession could be shortened to 4 years if we have super policy and good luck. The recession could stretch for 6 years if we have poor policy and/or bad luck. Note that this prediction was issued before it was determined that we have had 11 months of recession. The length is irrespective of how long we have currently been in recession. Given this schedule, growth will return in September of 2013. HSBC is no collection of rooty-poots. HSBC is the world's 4th largest corp and 2nd largest bank. Given a couple more weeks of this mess, they will probably be the world's largest bank. Citi is going down sharply.

This prediction does not bode well for President Barak Obama, but that is a subject for another post.

As I have mentioned in a previous post, the grand ultimate cause of this disaster is the insane price of housing. Financial order cannot return until the real estate market is finished correcting itself. It is going to take a long, grinding, brutal deflation to shave another 30% off the cost of the common housing stock. There has to be a large and growing population of losers over a long and sustained period of time to make this happen.

I concur with HSBC: 5 years is the likely length of this present recession. 4 if we have good luck and policy. 6 if we have lousy luck and policy. Growth will return in September of 2013.