Footsteps of a recession grow louder

Economists can't officially call it a 'recession' until six months after it began, but this one's arrival seems noisier.

from the January 28, 2008 edition

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Last October Jack Lavery, a consulting economist in Spring Lake, N.J., also predicted a recession starting in the last quarter of 2007. Last week, he noted: "Republicans and Democrats are falling over one another to be perceived as the architect of saving the economy."

Neither economist expects a quick end to the assumed recession. Mr. Lavery says the slump will last two or three quarters of 2008, with the Fed "coming to the rescue" by pushing the Federal Funds interest rate (on loans between banks) down to 2 percent by the end of this year and to 1.25 percent by spring 2009. Lavery also doesn't see a turnaround in the housing market until late this year, with house prices down 15 to 20 percent from their peak.

Mr. Hunt, who helps manage $3.5 billion in bonds for large institutions, has little faith that either Fed action or fiscal stimulus will "provide much relief" to the economy soon. He assumes it will take time for financial institutions to rebuild capital after their big losses of recent months.

Such skepticism about fiscal rescue packages, of course, won't stop Washington from leaping into the fray. Hunt cites surveys by economists Joel Slemrod and Matthew Schapiro of the University of Michigan indicating that recipients of the 2001 tax rebates, meant to counter the recession then under way, would spend only about one-third of the $600 rebated to couples and $300 to singles. This was true of lower-income people as well as those with higher incomes, they found. Such spending, the theory holds, would boost business sales and thus the economy. The extra $38 billion in federal debt created by the rebate would not need to be repaid until years later when, it is assumed, the economy will be in better shape. The 2001 rebates weren't ineffective, says Professor Slem­rod, but also "not as effective as one might hope. We can't expect miracles."

Congress and the White House agreed last Thursday on a bigger fiscal package of $145 billion, about 1 percent of GDP (the total output of goods and services in the nation). Such action is more civil than what happened in 1934 during the Great Depression when the social safety net was weak. Farmers in Le Mans, Iowa, threatened a judge who had approved farm foreclosures with lynching. Instead, they beat him badly and left him in a ditch. At foreclosure auctions, neighbors sometimes arrived carrying shotguns. It took courage to make a bid.

Frank Genovese, a retired economist at Babson College in Wellesley, Mass., suggests a modern, more civil equivalent: Raise government fees on banks foreclosing homes to a level that will encourage them to reach a more favorable mortgage deal with endangered homeowners.

Expect to hear more about recession rescue tactics in the months ahead.

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