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A good old-fashioned recession

By on November 4, 2008

The pace of the Titanic-like sinking of America’s financial infrastructure is moving at such a rapid clip that by the time you are reading this, it is likely that new tremors have already wiped out even more money and continued to lower demand for pin-striped suits everywhere. The full shock began to sink in for me when I opened the morning edition of The Wall Street Journal on September 23. Staring me in the face was a headline that is hard to forget, coming from that stalwart of stalwarts of American wheel and deal capitalism and optimism. It read: “The End of Wall Street.”  

 

Though events are moving in fast-forward, a few things are clear: (1) this is bigger than the failure of a few rogue investment banks and financial institutions; (2) America is about to enter a major and probably prolonged recession; and (3) the ripple effects will know no borders, damaging economic security across the world.

 

The implications of these events may seem esoteric at times, especially when the vocabulary of the crisis consists of credit default swaps, securitization, and collateralized debt obligations. But let there be no doubt – the suffering and agony are coming soon to a theater near you. We have only reached the tip of the iceberg, so to speak. 

 

If you think I am painting a pessimistic scenario, there is more. For average households that have already been struggling with creeping inflation over the last months on commodities – most prominently gasoline and food – add to this the double whammy of negative economic growth and potentially double-digit unemployment. Remember the terminology “misery index,” which was a measure of unemployment and inflation during the stagnant Carter years? Get ready to start hearing it all over again.

What all this means for the middle class American family is that economic anxiety is going to be on the increase for the foreseeable future. Inflation will likely remain high, and job security will disappear as layoffs across most sectors, especially manufacturing, will skyrocket.

 

Lots of numbers and scenarios will be thrown about in the coming months by the government and media pundits – bailouts, restructuring, recapitalization, lowering of interest rates and so forth. But the message to the average household is that it’s time to brace for a good old-fashioned, old school recession. Not a depression, just a tough recession.

 

For those who have been quick to condemn so-called “renegade American capitalism,” it should be noted that there is no immunity in today’s globalized markets, and the contagion has already spread to European banks. Here in Japan, the banks have healthy balance sheets and are well-positioned to ride the storm out this time, even benefit, but the overall economy is already in recession and will suffer more as exports weaken. 

 

The sharp economic downturn that is in the works will no doubt have its ugly moments, including the collapse of giants, a rise in poverty, malaise and pessimism. These are all classic characteristics of a recession. Despite all the nastiness inherent in that, market capitalism, the American economy, and American innovation have historically proven quite resilient. Recessions do have a naturally cleansing effect that encourages rebirth. As time passes, survivors will emerge stronger and innovative businesses will be born from the rubble. The landscape will be different, but it seems unlikely that the energy and innovation of American capitalism will have marked a permanent retreat.

 

Andrew Oplas works at The World Bank in Tokyo. This article represents his personal views, not necessarily those of the World Bank.

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