The Great Recession: U-shaped or L-shaped?
Roubini, Abedian Predict Prolonged Recession
By Claire Bisseker, April 17, 2009
Last year, the debate over how long the recession would last was between those who thought it would be “V-shaped” – a sharp fall followed by a quick rebound in global growth, with the whole recession lasting only about eight months – and those who thought it would be “U-shaped”, lasting at least two years (three times as long as the 1990 and 2001 recessions) and more than three times as deep.
The US is now in the 15th month of a U-shaped recession, in line with the forecasts of those like Nouriel Roubini, the New York University professor who accurately predicted the financial crisis, earning him the nickname Dr Doom.
A year ago, Roubini thought the risk of an L-shaped recession (a protracted period of economic stagnation like the one experienced by Japan in the 1990s, after its housing and equity bubbles burst) was quite limited. His reasoning was that the US policy response had been so much more aggressive than in Japan, which had waited almost two years after its crash to ease monetary policy and provide fiscal stimulus.
Also, Japan postponed corporate and banking restructuring for years. Roubini expected that the efforts to restructure impaired assets and firms in the US would start earlier and be more aggressive.
Since then, his outlook has soured markedly, partly because of the pace and severity of the global decline but also because of the failure, until very recently, of the US to come up with a credible bank rescue plan.
Now Roubini believes there is a one in three chance that the world is in for an “L-shaped” recession. Most commentators believe the global economy will recover from recession next year, if not before, thanks to the unprecedented monetary and fiscal stimuli being thrown at it. But this enthusiasm may be based on a superficial reading of the situation.
Independent economist Iraj Abedian contends that the leaders of the developed world have taken the easy way out in their diagnosis of what caused the crisis. Therefore their remedies are inadequate and may even prove more harmful than the disease in the long run.
So far, the bailout packages, rescue plans and stimulus interventions have all assumed that the problems are cyclical – hence the overdose of monetary and fiscal action worldwide. Abedian submits that the picture is more complex. “While the tipping point action was caused by the US mortgage excesses, the root causes are mostly structural and not financial,” he says.
He identifies three main causes:
The moral failure of the Anglo-Saxon governance value system. This has been manifest over the past decade in corporate scandals such as the collapse of Enron and of a few reputable audit and insurance firms, and the Savings & Loans Fund crisis in the US. “What do you do when moral values decay?” asks Abedian. “When the private sector knowingly bundles together bad assets and sells them on; when credit rating agencies knowingly rate these assets too highly; and when regulators knowingly fail to put a stop to it?”;
The failure of the prevailing Anglo-Saxon paradigm that holds that “the market knows best”. The premise was that the state’s value system – based on protecting the public interest – would exercise a check on the inherent excesses of the market system, explains Abedian. This presumption has been shown to be hollow. In fact, it was the US government’s desire for a rapid recovery after 9/11 – in the ideological battle to defend the market regime from attack from terrorists – that resulted in real interest rates being kept too low for too long, sowing the seeds of the subprime crisis. In economic terms, what has befallen the Anglo-Saxon world is the simultaneous failure of “the market” and “the state”;
Another structural root cause continues to be an unbalanced global trade regime, whereby the developed world wastes US$1 trillion on agricultural subsidies a year, withholding from the developing world the opportunity to produce the same goods more efficiently.
How long the world will be mired in the flat segment of the L, if this is going to be the shape of things to come, will thus depend partly on how soon macroeconomic stability can be restored in the US, EU and other key regions.