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Will This Recession Become a Depression?
WASHINGTON (March 2) - A Depression
doesn’t have to be Great — bread lines,
rampant unemployment, a wipeout in the
stock market. The economy can sink into a
milder depression, the kind spelled with a
And it may be happening now.
The trouble is, unlike recessions, which are
easy to define, there are no firm rules for
what makes a depression. Everyone at least
seems to agree there hasn’t been one since
the epic hardship of the 1930s.
But with each new hard-times headline,
most recently an alarming economic contraction
of 6.2 percent in the fourth quarter,
it seems more likely that the next depression
is on its way.
“We’re probably in a depression now. But
it’s not going to be acknowledged until
years go by. Because you have to see it behind
you,” said Peter Morici, a business
professor at the University of Maryland.
No one disputes that the current economic
downturn qualifies as a recession. Recessions
have two handy definitions, both in
effect now — two straight quarters of economic
contraction, or when the National
Bureau of Economic Research makes the
Declaring a depression is much trickier.
By one definition, it’s a downturn of three
years or more with a 10 percent drop in economic
output and unemployment above 10
percent. The current downturn doesn’t
qualify yet: 15 months old and 7.6 percent
unemployment. But both unemployment
and the 6.2 percent contraction for late last
year could easily worsen.
Another definition says a depression is a
sustained recession during which the populace
has to dispose of tangible assets to pay
for everyday living. For some families,
that’s happening now.
Morici says a depression is a recession that
“does not self-correct” because of fundamental
structural problems in the economy,
such as broken banks or a huge trade
Or maybe a depression is whatever corporate
America says it is. Tony James, president
of private equity firm Blackstone ,
called this downturn a depression during
an earnings conference call last week.
The Great Depression retains the heavyweight
crown. Unemployment peaked at
more than 25 percent. From 1929 to 1933,
the economy shrank 27 percent. The stock
market lost 90 percent of its value from
boom to bust.
And while last year in the stock market was
the worst since 1931, the Dow Jones industrials
would have to fall about 5,000 more
points to approach what happened in the
Few economists expect this downturn will
be the sequel. But nobody knows for sure,
and nobody can say when or whether the
downturn may deepen from a recession to a
In his prime-time address to Congress last
week, President Barack Obama acknowledged
“difficult and trying times” but
sought to rally the nation with an upbeat
vow that “we will rebuild, we will recover.”
The next day, Federal Reserve Chairman
Ben Bernanke told the House Financial
Services Committee that the “recession is
serious, financial conditions remain difficult.”
He held out a best-case hope that it
might end later this year, with “full recovery”
in two to three years.
Despite the tempered optimism, the economic
outlook remains grim. Consumer
confidence has fallen off the table, stocks
are at 12-year lows, layoffs come by the tens
of thousands, and credit remains tight.
The current downturn has many of the
1930s characteristics, including being
primed by big stock market and real estate
booms that turned to busts, said Allen
Sinai, founder of Boston-area consulting
firm Decision Economics.
Policymakers and economists note there
are safeguards in place that weren’t there in
the 1930s: deposit insurance, unemployment
insurance and an ability by the government
to hurl trillions of dollars at the
problem, even if it means printing money.
Before the 1930s, any serious economic
downturn was called a depression. The
term “recession” didn’t come into common
use until “depression” became burdened by
memories of the 1930s, said Robert McElvaine,
a history professor at Millsaps College
in Jackson, Miss.
“When the economy collapsed again in
1937, they didn’t want to call that a new depression,
and that’s when recession was
first used,” he said. “People also use ‘downward
blip.’ Alan Greenspan once called it a
Most postwar U.S. recessions have come after
the Fed has increased interest rates to
cool down rapid economic growth and inflation.
Later, the Fed lowers rates and
helps restart the economy, with the housing
and auto sectors — both sensitive to interest
rates — leading the way.
This time is different: As Senate Banking
Committee Chairman Chris Dodd, DConn.,
said, “Our housing and auto sectors
are leading us not out of recession, but into
What’s more, the Fed no longer has the
ability to kick-start recovery by lowering interest
rates. The central bank has already
effectively lowered the short-term rates it
controls to zero.
And there are no guarantees the massive
economic stimulus package and series of
bank bailouts will stave off a nightmare recession,