Why Are We Different?

I have been receiving great diverse views of what holds for 2010. Some are saying we are going to grow at 5-6% or at least 1-2% or dip back into recession. Why such disparity? I think part of the reason is a basic disagreement on the nature of the just-lapsed recession.


The optimistic argue that look that the past recoveries from recessions, they were always strong in the first year and suggesting a 5-6% is not all that aggressive. And I would tend to agree that if the past recession was a typical recession. But what we have just gone through a recession that was unlike any other we have experienced since the Great Depression. Typical recessions are inventory-adjustment recessions, caused by businesses getting too optimistic about sales and then having to adjust. We get temporarily higher levels of unemployment as inventories drop and they we get the rebound. It is not quite as simple as that this time around.

This recession was caused by not too much inventory but by too much credit and leverage in the system. And now we are in the process of de-leveraging. It is a process that is nowhere near complete. While the crisis stage is over, at least for now, there is still a lot of debt to be retired on the consumer side of the equation and a lot of debt to be written off on the financial system side. Total consumer debt is shrinking for the first time in 60 years and the decline shows no sign of abating. Credit card companies have reduced available credit by $1.6 trillion dollars while credit card delinquencies are hovering near all time highs.

Strain is also seen in the housing sector. Residential delinquencies are up and now stand at a stunning 9%. We are likely to see a significant increase in mortgage resets in 2010, which will see even more foreclosures. There is a lot of pain to come. This is not an environment that is typical of past recessions. There is certainly a lot of de-leveraging to be done, both as banks write-off bad debts on homes and as consumers walk away from mortgages badly underwater. The next coming debacle is on commercial real estate loans as total loan delinquencies at banks are rising precipitously every month.

While Obama is urging banks to lend, bank regulators are telling banks to raise capital and shore up their balance sheets. One way is to lend less and invest in US government bonds. Past post recession expansions have been built on growing credit and leverage and this will not be the case this time around. There will be little political will to continue with massive stimulus as the federal government is running massive deficits.