As the IMF's latest World Economic Outlook makes clear, there are recessions and recessions. The worst are the ones created by a financial crisis, especially a crisis rooted in the banking sector. When recession is globally synchronised, that makes things even more difficult because no country can export its way out of trouble (as the East Asian economies could in 1998). Today, we have a combination of a financial crisis and a globally synchronised recession. So, expect recovery to be a slow affair. Not until 2010, says the IMF, and even then it will be long drawn out.
When you have a crisis rooted in the banking sector, the way out is to fix the banking sector. Sadly, the US administration has been dragging its feet over this for more than a year now. Fixing the banking sector in the US, given the scale of losses, means nationalisation. There is just no other alternative. But nationalisation would wipe out shareholders and too many rich people, including those in the US administration, don't want that. They would like to look for alternatives that preserve shareholder wealth. But every one of these alternatives entails a slow and painful economic recovery.
It won't be a Great Depression for reasons I spell out in my ET column, Don't bank on an early recovery. But it won't be a mild and short recession either.
I wrote my ET piece and sent it off last week as I was due to travel. On my return, I was gratified to note that my assessment accords with that of both Martin Wolf of the FT and the Economist. Wolf writes:
For better or worse, the authorities have decided to bail out their financial systems with taxpayer money. Almost all the affected countries should be able to afford to do this, at least on the IMF’s numbers. So now, having made the fundamental decision to prevent bankruptcy, they must return their financial systems to health as swiftly as they possibly can.
Even so, that will prove to be a necessary, not a sufficient, condition for a return to robust economic health. The overhang of debt makes deleveraging inevitable. But it has hardly begun. Those who hope for a swift return to what they thought normal two years ago are deluded.
Says the Economist:
The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.