US recession will dwarf dotcom crash

[flashl]

The recession facing the United States is of a scale that dwarfs the dotcom slump. The slowdown will cause a damaging regulation backlash as governments attempt to compensate for the financial pain facing families. Britain faces a similar plight, though it may avoid as deep a slowdown as the US.

The views of Stephen Roach, one of the world's leading economists, now heading the Asian wing of Morgan Stanley, would have seemed outrageous at last year's World Economic Forum. It is a sign of the times that they are now close to the consensus. This year's event has been dominated by discussions of the stock market slump on both sides of the Atlantic, the Federal Reserve's emergency interest rate cut and the SocGen fraud disaster.

But underlying everything has been the silent truth that the US is facing a very possible recession, and is fast having to adapt to a far less enjoyable economic climate.

...

The reason this crunch will be so much worse, he said, is that the chunk of the economy which is shuddering to a halt - homebuilding and housing dependent consumption - is six times bigger than the spending on IT, which triggered the last one.

"The magnitude dwarfs anything we saw seven years ago."

The endgame, he said, is an "average recession" meaning just over a year's worth of economic shrinking - three times the depth of the recession seven years ago.

Telegraph UK

[EmperorHasNoClothes]

1. And if a Democrat is elected in November, they will be blamed.

Count on it.

[flashl]

2. Hope not. Many voters hopefully will remember they are in pain TODAY. nt

[jimlup]

31. voters don't have a memory

They align to meaningless jingoism... that's obvious since they elected GWBush twice.

[Fresh_Start]

3. make it happen before the election

stop all discretionary spending
most of us can no longer have a tax paying protest because employers take it off the top
but we can cripple consumer spending

[peacetalksforall]

6. So what about those who work for the companies, those who have small businesses of

all sizes - cut them off also?

[Fresh_Start]

9. yes

it is not our responsibility to create a massive debt load for ourselves or our dependents
those debts are being converted into taxpayer debt which will be paid by people who did not spend
the average US consumer has something like 10K in credit card debt and owes about 40K in the national debt
how is spending more the right answer?

spending less and being more responsible as individual consumers is part of the answer

[onehandle]

4. They're already blaming Clinton/Gore.

You know... Those guys from eight years ago.

[still_one]

10. Clinton sure had his hand in it, but that is because he continue the repuke

policies of deregulation

Remember the Gramm-Leach-Bliley Act which effectively repealed the Glass-Steagall Act. That was Clinton

The deregulation that reagan and Clinton managed to push through has put us into a very precarious situation

[papau]

13. Say what? How would Glass-Steagall have stopped anything re housing bubble?

While we now have competition among banks, securities companies and insurance companies (Glass-Steagall prohibited a bank from offering investment, commercial banking, and insurance services) how dis this cause the housing bubble? Besides the waiver process already allowed such mergers (the last one before the bill being the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation combination announced in 1993 a few months after Clinton took office, with the 1986 Norwest offering all types of financial services products, and then American Express attempting to own almost every field of financial business - Under Bush41 commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage - only insurance underwriting was newly permitted after Gramm-Leach-Bliley and to this day that is hardly ever done by the newly impowered to do such underwriting companies). GLBA did not remove the restrictions on banks placed by the Bank Holding Company Act of 1940 (preventing financial institutions from owning non-financial corporations).

The Gramm-Leach-Bliley Act was mainly a Privacy bill - preventing the banking, brokerage, and insurances divisions of a company from working together via your personal data being shared, and providing safeguards against theft of personal data.

[still_one]

19. It allowed banks to engage in activities that were considered too risky

and not appropriate for banks

My impression was that the Glass-Steagall Act said banks and other financial institutions were not allowed to offer financial services, like investments and insurance-related services.

It was justified that its repeal by saying bank depositors are protected by FDIC and other safeguards

In my view this was just another nail in the coffin to remove safeguards.

Citi and other major banks have reported MAJOR losses, because of the real-estate bubble, with loans that banks never used to be allowed to make. It may not have been due to the Gramm-Leach_bililey Act, but it sure represented a tendency for institutions to engage in more risky activities that had not been allowed since the depression

I also believe that the tax payers will be covering the losses for those banks, just like we did for the S&Ls during reagan

Appreciate the information, and agree that it didn't cause the housing crisis, but indicated a continuing trend toward deregulation of industries that were highly regulated

[papau]

24. Not quite the situation - as in my first post -the Reagan "waiver" policy had banks doing everything

in the new bill except ins. underwriting - which they still don't do despite being given permission in the new bill.

I pointed out Norwest and American Express in the previous post - and of course Citi.

It is not a deposit safeguard problem - it is a securitization problem (the loan repayment streams are packaged and sold off as a security.

The "loans that banks never used to be allowed to make" is untrue - they were allowed - the securitization just put more money into the system for them to loan out.

I agree that the continuing trend toward deregulation of industries that were highly regulated that Reagan began needs to be reversed - it is just the pulling of Clinton into what should be a discussion of Reagan/Bush is unfair.

Heck - even in Telcom - where Clinton did initiate a new round of deregulation, folks need to remember that the initial round under Reagan saw close to 500 ownerships decrease to 12 (to reach the 95% of all media level). -- Clinton's bill reduced this (allowed the mergers that reduced it) to 6 (meaning the ownership that controls 95% of all media in the US is 6 corporations).

[still_one]

29. Thanks, I appreciate your insight. No argument from me on the roll Reagan

played in all this


Thanks for the information

[still_one]

5. No, because it is both their faults. It started with reagan and his deregulation

and was capped by Bill Clinton with his deregulation

[still_one]

22. It will also be hard to blame the Democrats because who has been in control?

The republicans controlled the executive branch, and essentially Congress for most of the past 8 years, it will be very hard for them to hide from their actions.

[Tandalayo_Scheisskopf]

7. "Damaging Regulation Backlash"???

:wtf:

How can regulations that stop behaviors, such as we have seen in the mortgage meltdown, be damaging? Did these people, writers and business "eckspurts" alike, go to the University of Mafia Palermo?

"Laws for thee, but not for me" is the new business mantra.

[flashl]

11. Saw that. Most of this occurred in the unregulated shadow banking sector. nt

[papau]

18. “Shadow Banking System” refers to securitization of loans that began back in the 70's - a stock

market financing of credit - BUT WHICH DEPENDED ON THE BANKING REGULATORS TO FED THEM WITH GOOD LOANS.

How would you regulate securitization so as to prevent housing bubble?

The answer is that the buyers of the securities pick up risk already on the books - and no regulation of the securitization would change anything.

[flashl]

20. Thanks for the response.

Do you think that is where this author is going with his arguments?

Shadow banking

Alan Greenspan claims not to have known the deleterious effects of having outsourced mortgage lending from the "traditional" banking system to unregulated Wall Street firms.

The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics. Bernanke’s fellow governors and Hank Paulson’s staff at the Treasury spread their roots during an era in which traditional banking activity – lending out deposits backed by a certain level of reserves – was the accepted vehicle for liquidity creation.

... financial innovation has done an end run around the banks. Derivatives and structures with three- and four-letter abbreviations – CDOs, CLOs, ABCP, CPDOs, SIVs (the world awaits investment banking’s next creation; perhaps IOU?) – can now take a “depositor’s” dollar and multiply it ten or 20 times. Reserve banking, and the Federal Reserve that regulates the system, appear anemic in comparison.

The Mess that Greenspan Made

[papau]

26. yes - SEC regulations might have helped, FED regulations re ownership of such securities would have

helped.

[flashl]

27. Thanks. nt

[Jim__]

8. They'll blame it on the dems no matter what happens in November.

And, they'll get away with blaming it on the dems because the media will parrot whatever the RNC tells them.

[still_one]

12. That won't fly, because both are up to their neck in it. Just google

and see what reagan and Bill Clinton did in reference to deregulation

[papau]

15. Clinton has telecom deregs only - the Banking merger rules change was minor as "waivers" had done

the same during Reagan/Bush - see upthread for detail.

[still_one]

17. My understanding the largest deregulation of the banking industry occurred then

Thanks for the heads up regarding the upthread, I will take a look

[papau]

25. defacto deregulation via "waivers" had already occurred

[LogansPapa]

14. The Garbage Man/Woman Cometh

Whoever wins the White House in November will spend their only/first administration in the attempt to clean-up what George W. (Blinky) Bush has turned into garbage. If it’s a Democrat, that person will have the very thankless task of attempting to neutralise some really rotten images abroad and realities here at home. This as our economy continues to spiral to whatever basement it will ultimately reach and then a new series of taxes upon the American people will attempt to redress the previous eight years gluttony.

A Republican president won’t fair much better - except that he will be able to look forward to his cronies keeping their heavy cash here, in the domestic markets - looking to feed on the carrion left on the stock market floor, rather than shuttle their monies overseas - which is what will come about if their opposition wins the Oval Office.

[2Design]

16. this is why the fed reduced the rate to stall this thing until after the election

they want the democrats to take the blame - just like benacke is being blamed for greenspans mistakes

[still_one]

21. They reduced the interest rates to try and minimize the effects of the recession

I might agree with you that Greenspan would play games like that, and in fact bears part of the responsibility for creating this situation, but Bernake inherited this mess, and is doing everything he can to lessen the impact of the recession

[2Design]

23. they said they did that to reduce the impact but if they were smart

they wouldn't have let it happen in the first place - they wanted the republicans to have a free ride and appear to have good economics - your heading sounds like you believe them - I don't

[still_one]

28. I don't blame Bernake on this. It took years of deregulation

excesses and greed that brought us to where we are

You are correct, they should not have let it happen in the first place, but where was Congress, as they were deregulating everything?

[sendero]

30. Yes..

... too bad that the aversion to recession is partly the blame for the severity of the mess we're in, and that all it can really do is delay the inevitable.

The continual attempts to bail out bad policy with more bad policy does not make for good policy.