“We’re in a Recession”

Joel Prakken, chairman of Marcoeconomic Advisers, had some sobering news for St. Louis County business leaders on Oct.  9. Speaking at Midwest Bank Centre's annual economic breakfast, Prakken said, "we're in a recession," and he predicted it will last until June 2009.

Prakken is forecasting "a garden variety recession," unemployment rising to seven percent, home prices falling another nine percent, and the nation's gross domestic product falling two percent before recovering, but he added that if he is wrong, things are more likely to be worse than he expects rather than better.

The forces driving the economy into recession are "the destruction of wealth" from falling stock prices and falling home values and a tightening of lending standards. The destruction of wealth so far is comparable to the amount of wealth destroyed when the dotcom bubble burst in 2000, he said, "but it is more pernicious, because stock losses don't affect consumption as quickly as losses in housing wealth."  Magnifying the effects of the loss of wealth is a "considerable tightening of lending standards," he said. "Lending standards are tighter now than in any time since we started keeping records in the 1960s," he said, "they are even tighter than in1980." In the recession that followed the tightening of lending standards in 1980, unemployment reached 10.8 percent.

Lower interest rates, declining energy costs, and stabilizing home values will lead to recovery, he said.

Prakken was full of praise for the way that Benjamin Bernacke and the Federal Reserve Board have respond to the situation. "The Fed has been aggressive and ingenious in providing liquidity," he said, and as a result they have prevented a 1930s-style collapse of the nation's banking system.

Still, he added, there is a risk that the Fed's actions, even with the so-called "bailout" bill passed by Congress, will not be enough to get banks to lend to one another and so stimulate the economy. If that happens, the U.S. could get caught in a deflationary, zero growth trap such as the one that caught Japan in the 1990s. If that happens, unemployment could rise to nine percent, he said.

Prakken also called the political backlash against the bailout bill "hogwash." The alternative, he said, "was 15-20 percent unemployment, the cost of which would quickly dwarf the cost of the bailout bill, not to mention the human suffering it would cause."

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