The current recession is liable to be the worst since 1981-82, a local economist told area members of the Institute for Supply Management Thursday night.
“We might have some prosperity in 2010,” said Steb Hipple of East Tennessee State University’s Bureau of Business and Economic Research. “You can write 2009 off.”
Hipple said the housing bubble — and how intertwined it became with the now-flailing financial system — created a situation that, while he doesn’t think it will end in a depression, has parallels to 1929.
“The feeling is that nationally we are moving into a very severe recession,” Hipple said. “Many people out there won’t remember the way it was in 1981-82, but their memory will be refreshed.”
While government intervention in the economy is “to create a shallow bottom for these business downturns,” Hipple said the “meltdown in the financial system” makes current conditions different from a normal business cycle. Therefore, he said, the current recession will surpass the mild recessions of 1990-91 and 2001.
“The problems we have had in the financial sector are going to turn what would have been a mild recession into a severe recession,” Hipple said. “The good news is we will not have another Great Depression.”
Hipple spent some time explaining the basics of economic indicators and pointed out that several of them — including employment, industrial production and trade imbalances — are troublesome.
He also explained the difference between short, shallow “V-shaped” recessions; longer, deeper “U-shaped” recessions; and shallow recessions with slow recoveries — “L-shaped” recessions like the last two. He predicted the current recession will mimic those of 1974-75 and 1981-82.
“It is not only going to be deep, it is going to be enduring.”
“The total losses in jobs (since January) is about 1.2 million, and it will go higher,” Hipple said of unemployment.
“I think we’re going to see levels of unemployment not equal to but close to the levels that we reached in 1981-82, which was above 10 percent.”
“Things will hit a bottom next year, and we will move out of it at some point, but I think it will be U-shaped. We’re looking not just at strength of the recession but duration. By 2010, good times will be here again, I am anticipating.”
Hipple said what kept the housing bubble going longer than it should have was the creation of derivatives in the mortgage market, bundling packages of mortgages that ultimately left institutions highly leveraged, with no real collateral behind them.
Hipple had praise for Federal Reserve Chairman Ben Bernanke and said his and others’ leadership at the federal level will be the main things that prevent a depression. That leadership, Hipple said, probably will involve massive deficit spending until the economy gets out of the woods — something that likely will limit Barack Obama’s agenda for at least the first half of his presidency.
“This big deficit ... is saying that the government is willing to do whatever is necessary and the central bank is willing to fund that on top of what they’re already doing,” Hipple said. “We’ve got to get through the recession, then we can start trying to put the pieces back together.”
Putting those pieces back, by Hipple’s reckoning, would involve much more regulation of the financial industry.
“It was not understood how corrupt the financial system had become,” Hipple said. “We had new kinds of financial instruments that emerged since 2002 (after repeal of the Glass-Steagall Act), we built more houses than we needed, we built houses that nobody could really afford, and it’s resulting in an ongoing economic bloodbath.”
“It’s going to have to be cut down and rebuilt from the foundation up,” Hipple said. “Otherwise we’ll have the same mess all over again in another 10 years.”