Eight reasons why we are in a depression

by on January 11, 2009 at 8:03 am in Economics | Permalink

1. We have zombie banks.

2. There is considerable regulatory uncertainty in banking and finance.

3. There is a negative wealth effect from lower home and asset prices.

4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.

5. Some of the automakers are finally meeting their end, or would meet their end without government aid.

6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.

7. International factors are strongly negative.

8. There is a decline in aggregate demand, resulting from some mix of 1-7.

I have two simple points,  First, a large fiscal stimulus addresses factor #8 but fares poorly in alleviating the other problems.  Of course it may give a band-aid for #5 or #6 and you can tell other stories but we are in a multi-factor depression.

Second, forecasting will prove very difficult.  These factors interacted with each other in a unique manner on the way down and they may well interact in an unpredictable manner on the way back up, whenever that comes.  Just for a start, who has a good model of #1, #2, or #6?  Right now we're seeing a lot of good faith efforts to develop forecasts, but I say don't believe any of them, whether they support your point of view or not.

1 fusion January 11, 2009 at 8:15 am

1. Nationalize the zombies, clean up the balance sheets, IPO them back to public ownership. Often referenced as the Swedish approach.

2. New administration to announce regulations

3. This will take time

4. Similar to 3

5. The problem is more about transitional employment and confidence. Someone will make enough cars

6. Obama is not Bush and Obama’s team is not Paulson. Competence may help here. The new admin is likely to do better on the animal spirits front (YMMV).

7. true

8. With luck, government spending and policy will increase demand. Fixing one problem is better than fixing none.

Forecasting is always difficult and everyone has a terrible track record.

2 David Thompson January 11, 2009 at 8:50 am

That’s a good list, and I particularly agree about the difficulty of forecasting. If these factors interact in a unique and unpredictable manner, we don’t even know if a range of forecasts spans the space of the possible outcomes. Like always, we will have to keep our eyes and ears open, and remain alert to a wide range of variables as events unfold. Maybe the forecasting problem is even worse. For example, we ought to remain alert to the impact of the downturn on other economies and societies, each with its own set of problems, and to how they react in terms of trade barriers, currency policies, etc that feed back to impact on the rest of the world economy.

3 DanC January 11, 2009 at 9:15 am

Number 2 should be uncertainty about the Obama administration; specifically the future of spending, taxes and regulation in a Federal government dominated by Democrats

4 Steve Sailer January 11, 2009 at 10:28 am

Basically, we turned out to be not as rich as we thought we were.

The fundamental question is whether demographic change — the decline in average human capital from importing tens of millions of people with grade school educations — means that we aren’t going to get back to that level of per capita wealth the markets thought we had on 7/1/07.

California appears to be finally sinking toward the level of wealth that its paltry per capita human capital suggests (California is down at the bottom of the NAEP school test scores, just above Mississippi, largely because of its huge number of Hispanic students).

Will the rest of America follow?

5 Steve Sailer January 11, 2009 at 10:36 am

The Census Bureau recently forecasted that America will add about 100 million Hispanics to its population from 2000 to 2050. A massive study by sociologists at the UCLA Chicano Studies program of Mexican-Americans in Los Angeles and San Antonio in both 1965 and their children in 2000 found that fourth generation American-born Mexican-Americans have a college graduation rate of 6% versus 35% for non-Hispanic whites. Hispanic households average about one-tenth as much net worth as non-Hispanic white households.

This long term decline in median human capital in the U.S. due to massive Hispanic immigration was not being included in economic forecasts up through 2007 due to political correctness. If we start to be realistic about the demographic impact of illegal immigration and higher Hispanic birthrates, it may start to look like what we are seeing is not a shorterm blip but a permanent correction as the markets become more realistic about how much the American population of the future can actually produce.

6 Anonymous January 11, 2009 at 10:58 am


Assuming we take all that as a granted, that wouldn’t mean that we need an economic correction of any kind. At most it would mean that the rate of expansion per capita would decrease.

7 Phil P January 11, 2009 at 12:08 pm

I think Tyler may be omitting something, mainly the confidence shock resulting from the Lehman bankruptcy; that and the resulting crash in the financial markets. At that point businesses, even ones not themselves affected by the credit crunch (and it is said the cash position of corporations as a whole was good) concluded that a much more severe recession/depression was in the offing and began laying off workers. In other words there was the kind of crisis of confidence that became a self-fulfilling prophecy. The 1929 stock market crash probably had a similar effect. I guess what I’m saying is that Tyler may be overestimating the influence of “fundamental” causes, not those weren’t serious too.

8 Mick January 11, 2009 at 12:32 pm

Depression? Unemployment, growth and inflation is no worse than it was during the early 1990’s and the 70’s. Don’t be a drama queen. This is just another bust cycle caused by fed pumping, it will soon pass into an inflationary pseudo expansion and we will be on our way to the next boom cycle.

9 MM January 11, 2009 at 12:43 pm

“I can’t believe I’m defending Bush, but #6 seemed unfair. Bush and Paulson spooked everyone, but did so to raise enough capital to stabilize the banking system, which softened #1 and #2.”

And it’s not as though Obama and Biden – the “hope” that everyone has been paying attention to for the last few months – not to mention the Democratic leadership as a whole, haven’t spent the last few months scaring the bejeezus out of everyone. Or that the talking heads haven’t done it. Or columnists. Or bloggers.

10 mickslam January 11, 2009 at 12:56 pm


It is remarkable just how simple and “liberal” those solutions to problems are at this point.

Plus, I disagree with us being less wealthy than we were a few months ago. Our money is just worth more than it used to be. Measuring absolute wealth with money, a relative value indicating tool, is not wise.

11 Jay January 11, 2009 at 1:14 pm

9. George Bush over the last 8 years did everything in his power to ruin the economy through deregulation.

12 y81 January 11, 2009 at 1:27 pm

For the people who criticize Paulsen and valorize Obama, I have two questions: (i) what objective reason is there for me to believe that you are smarter or more knowledgeable than the CEO of Goldman Sachs? and (ii) is it your suggestion that Tim Geithner and Ben Bernanke have been kicking and screaming under the Paulsen yoke, and have a wildly different set of policies to implement? Because things will not improve otherwise.

Let me note that 2 is not really true, 3 has not in fact been important, 6 is poorly stated (see Brad DeLong for a better elucidation), but is actually the most important item, and 7 is stated so broadly as to be meaningless.

13 Barkley Rosser January 11, 2009 at 2:14 pm

I am not going to make any forecasts about when we either hit bottom or actually turn around and start going up again
in terms of GDP growth. However, Greg makes some valid points. The credit markets have noticeably stabilized in the
last few weeks, with the TED spread down sharply (120 bp), if still very high, and some of the really low refi rates
have bounced.

OTOH, what looks to me as the scariest of the factors Tyler has listed is #7, with this the arguably
most globalized recession we have ever seen, with only a few countries in sub-Saharan Africa not hurting
(the stock market in Ghana was up 60% last year). Even the Great Depression was a much more staggered affair and
barely touched some countries. The worst hit countries were Germany and the US, the former giving us Hitler and WW II.

Oh, and this globalized nature of the current situation proves Steve Sailer right. Japan and the UK are clearly having
bad recessions because of all their poorly educated Hispanic immigrants. Time to get out the pitchforks and white sheets!

14 Ten_Indicators January 11, 2009 at 4:15 pm

The ten leading indicators are well know. Have a look at what they show now. We are in a recession, and the leading indicators show us moving out. Have a look at
and you’ll see why 4 out of 10 bonifide indicators are now positive with several others moving positive by the time the conference board posts it’s next report.

Although the list is interesting, it does nothing to convince me of depression. List the ten leading indicators next time and their updated levels and you’ll have my attention.

15 brainwarped January 11, 2009 at 4:36 pm

K T Cat – I am not worried because I live in the USA… I expect the USA to get whatever money they want, when they want it, and then to loan it to the other countries when they are able. However, I do feel like this could turn into an interesting (psychological) Ponzi scheme, with the US “bailing out” its allies.

Steve Sailer – On the contrary, illegal Hispanics were vital to the boom period! They made many lower- and middle-class into upper-class residents by working for less than Americans value services. Moreover, I am struggling with the idea that the solution to our recession is legalizing the illegal immigrants. Yes, this would change many of our economic indicators in both directions, but if 10% of illegal residents started paying taxes and building credit so they could go into debt and get a college education, and move out of their “sponsors” $80,000 apartment with 15 inhabitants into one of the foreclosed homes, we could see great economic growth within a couple years. We may have to hold off on universal health care, like Obama is going to do anyway, but this may be the most effective “stimulus” or component to a stimulus ever created.

16 simone January 11, 2009 at 4:57 pm

A good economist should NEVER generate the type of list our esteemed blogger is offering us. The reason is simple, it focuses only on the factors that allegedly contribute to decline. None of the factors that potentially contribute to growth are noted. This more than simply the half empty logic, it is failing to enumerate the dynamics that propel our economy.

17 jorod January 11, 2009 at 6:30 pm

People borrowed to buy assets, now they have to liquidate assets to pay off their debts.

18 Jay January 11, 2009 at 8:12 pm

Because of free markets and greedy corporatist pigs, furiners, dey took er jobs!

19 ZBicyclist January 11, 2009 at 9:05 pm

Re: uncertainty.

There’s a surgeon, an architect and an economist.
The surgeon said, ‘Look, we’re the most important. God’s a surgeon because the very first thing God did was to extract Eve from Adam’s rib.’

The architect said, ‘No, wait a minute, God is an architect. God made the world in seven days out of chaos.’

The economist smiled, ‘And who made the chaos?’

20 rod January 11, 2009 at 10:40 pm

obviously the only sure way out is to increase investment in some new sector that is not residential or financial. what could that be? we need investment in new output that consumers want to consume. otherwise we are pushing on a string, merely trying to drive consumption of existing supply, which is grossly under utilized right now. how about clean energy? now that’s a good new sector that is unfunded, has huge growth, and requires lots of capital. of course, tax breaks won’t begin to bring in requisite capital.

21 David Welker January 12, 2009 at 3:39 am


You list eight factors, but does this really tell us much without estimates of their relative importance? How do you go about figuring relative importance?

22 Slocum January 12, 2009 at 10:20 am

I would add a number 9 and move it fairly close to the top of the list:

9. The sophisticated financial innovations that supposedly make it possible to manage risk much more effectively and take on much greater leverage safely turned out to be dangerously defective. The Detroit automakers seem a safer bet for long term survival than the investment banking and hedge fund industries.

23 Toadal January 13, 2009 at 1:56 am

Brainwarped – International PISA reading and mathematics test scores for Mexicans taught these subjects in Spanish are just as bad, if not worse, than those educated in the U.S. PISA officials estimate over 50% of Mexican 15-year old youth today are functionally illiterate and therefore unable to compete in Mexico’s economy.

http://www.worldfund.org/index.php?q=Education-Gap.html _and_ http://www.worldfund.org

In fact, Latin American students perform poorly on these tests, and even the best Latin American students tested often score only as well as the ‘average’ student in the most competitive economies. In fact, PISA tests have shown 2/3s of Mexican students could not consistently apply basic mathematical skills to understand an everyday situation while only about 20 percent of students in OECD countries showed similar deficiencies.

Building Human Capital – Is Latin American Education Competitive-.pdf

24 ranger_granger January 14, 2009 at 3:54 pm

1) The U.S’ manufacturing sector has been offshored to China (i.e., the jobs are gone, and credit cards can work for only so long).

25 don January 15, 2009 at 6:14 pm

Most blantantly missing and the prime cause of the recession is the “defense budget.”
http://www.warresisters.org/pages/piechart.htm Your list is creditless without this as number 1.

26 Webgazing January 28, 2009 at 2:07 am

Were in the mess that were in because people live above their means. I sell health insurance for a living and see people that live paycheck to paycheck but have a 46 inch lcd tv that’s on their credit card. What happened to buying something when you have the money for it. I would guarantee that if the public lived within their means there wouldn’t be the forclosures that there are now. You can not blame Bush for that. Or McDonalds for someone being overweight. It’s time for people to be responsible for their own actions. Now if you go back to the 20’s Americans lived above their means and bought things on credit such as radio’s. We’ll what happens when people live like a bunch of teenagers living on payday loans? Eventually you have to pay it back. A recession or depression is a positive thing to bring an overinflated market back to where it should be. Now don’t be mad at me for saying that but many people overextended and they have to deal with their decisions. Now I read in this post that Obama is going to fix the problem. Well the truth is no! Here is why. They tried a stimulis plan in the 30’s and it acually made the depression worse and dragged it out. What got us out was war. That forced our economy to get back to work. If Obama wanted things to work and did not believe in pork he would give the money to the people. That will increase consumer confidence. Our next bailout is going to be 900 billion. Here is what could be done with 900 billion. Every homeowner could recieve 8,000 dollars to help pay their mortgage, each adult can get free gas for a year, and we would still have enough money to spend several hundred billion to create green technology, create jobs, and get us off forein oil. Doesn’t this make more sense.

Look up more information on the depression on my search engine. http://www.webgazing.com

27 IT Certification April 8, 2009 at 1:13 am

I some where agree with your points but at certain place i have little different point of view of depression that i will explain you after my 1Y0-259latest Citrix Presentation Server 4.5 and XenApp 5.0 for Windows Server 2003: Administration exam for which I am confident to pass in first attempt as I have already passed my 642-436Cisco Certified Voice Professional CCVP certification exam along with the 642-383CXFF exam which intends primarily for Cisco Channel Partner Field Engineers from best Cisco service providers with high score as i will be free from this i will return on your page to tell what are exact factors of our depression.

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