A Depression by another name

Ethan Harris of BofA Merrill Lynch Global Research has good news...sort of.

The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good.
The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse

What Harris doesn't bother to explain is that if things are that bad then we are in a Depression.

Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 40 percent below five years ago.

On the other hand, Harris might be wrong.

“Things can get worse,” said Martin Feldstein, a professor at Harvard University in Cambridge, Massachusetts, and president emeritus of the National Bureau of Economic Research. “When the economy is moving forward at a very slow pace, very close to zero, the risk is we could slip over into the negative side of zero.”

So buck up. Things can't get much worse...unless they do.

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I've got to graph out the Great Depression macro numbers here and compare, but what recovery indeed! (otherwise let us also ignore the economic structural problems).

Deleveraging and Stimulus in Mortgage Balances

Much household bebt is contractual interest to financial institutions that have been rescued by the taxpayer, and much of this debt is at interest rates that are usurious in comparison to the cost of funds. Consumers are trapped by barriers to refinance (bank approval, redundant and bogus closing costs, negative equity that banks will not mitigate), and yet the Treasury can borrow for 10 years at 2.6% and short term rates are a joke. If you want real stimulus, let the US Government adopt a program of direct refinance of housing with the Fed buying the MBS thus created. Place the rates for USG refi mortgages at 1 to 1.4 percent over the 10 year Treasury, with the difference being used to pay servicers and compensate the Fed for realized losses on higher rate MBS. You expand the balance sheet at the Fed and realize significant rapid deleveraging. Increased household disposable income will provide demand-side stimulus, possible support for housing, and private sector jobs as consumers return to the marketplace. Of course, this deleveraging will affect the balance sheets of GSEs, but we’re on the hook for that already. This kind of action will require some political courage that I’m not certain either President Obama or Chairman Bernanke possess. But it beats hell out of the financial misery that overhangs this country and threatens future generations.

Frank T.

The Horse has already Bolted

It is too late to address fundamental issues and the crisis will now run its course. The biggest mistake was to not make the financial institutions take the loss on their balance sheets - bankers and shareholders would have paid for their business practices. The debt (bad balance sheet) have now been transferred to the taxpayer in the US and in other countries stupid enough to follow the same strategy. Also the vast majority of mortgage debt could have been converted to long term government debt at low interest rates to keep people in their homes and operating as viable consumers.

Unfortunately for the rest of us the 'system' has decided to look after its own and will bring about a systemic collapse of the financial system which will in turn feed into the real economy. One of many 'dominos' will trigger this collapse and bring down the rest. All of the measures that have been put in place have merely delayed the day of reckoning and Bernanke's Quantitative Easing 2 initiative will only benefit financial institutions in the short term but further deepen the problem - bit like throwing petrol on an already raging fire.