Wednesday, January 14, 2009

The Recession Will Be Over Sooner Than You Think

Two Stanford economists (Nicholas Bloom and Max Floetotto) make the case for strong economic growth by mid-year:

"The heightened uncertainty after the credit crunch led firms to postpone investment and hiring decisions. Mistakes can be costly, so if conditions are unpredictable the best course of action is often to wait. Of course, if every firm in the economy waits, economic activity slows down.

But now that uncertainty is falling, growth should start to rebound. Firms will start to invest and hire again to make up for lost time. Figure 2 above shows our predicted impact of the spike in uncertainty following the credit crunch, based on our detailed analysis of 16 previous financial, economic and politically driven uncertainty shocks. After falling by 3% between October 2008 and June 2009, we forecast real GDP will rapidly rebound from July 2009 onwards.

Many economists make the case for a stronger policy response. That might be right, but policy makers need to act fast. Any additional economic stimulus – be it a spending package, quantitative easing or a couple of rounds of liquidity injections – has to be enacted quickly. Dithering over different courses of policy will actually make things worse by adding uncertainty. Delaying the stimulus package until the summer may mean that it is too late. The economic medicine will be administered just as the patient is trying to leave the hospital!"

HT: Paul Sebastian


At 1/14/2009 2:07 PM, Blogger Dave Narby said...

These guys are dreaming.

If incompetent, uncompetitive companies were allowed to go bankrupt, AND the government switched to a sensible monetary and fiscal policy, then this might be true.

As it stands, we're in for a much longer, and more painful recession (perhaps even a bona fide depression) than this needed to be...

At 1/14/2009 2:08 PM, Anonymous Anonymous said...

Please tell me another fairy tale I need to feel better since the Dow is down 262 points at 8182. CDs are paying around 1% and I am laid off with gas prices at $2.00,
and I am late paying my ultilities.
Halle Barry said it best in Monsters Ball "Make me feel good"
while she was getting screwed in a downtrodden life.

At 1/14/2009 3:19 PM, Blogger Free2Choose said...

Seems these Stanford Economists are not alone. The Swedish Central Bank made a a similar announcement this week.

At 1/14/2009 6:13 PM, Blogger Bret said...

It's not in the governments interest for things to bounce back.

“You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.”

— Rahm Emanuel

The government will milk and extend this crisis as long as possible, just like FDR did (possibly unintentionally in that case) for the Great Depression.

At 1/14/2009 6:22 PM, Anonymous Anonymous said...

I would bet any amount of money neither of these economists had a freaking clue the slowdown was about to happen 12 months ago. They are clueless and rationalizing. After all, when is time any economist (or politician) was ever held to account for their words?

At 1/14/2009 6:36 PM, Anonymous Anonymous said...

That'll be nice. Then everyone can bow and worship Savior Obama for leading us out of the most difficult economic crisis of our times! He's so wise. So omnipotent. Keep those Keynesian policies coming!

At 1/14/2009 6:55 PM, Blogger Bruce Hall said...

Please call 1-800-uasucka for information about a zero-interest purchase of a bridge in Brooklyn. Some down payment required.

At 1/14/2009 7:00 PM, Anonymous Anonymous said...

The recession may be over as it becomes a Depression lasting 10 years.

At 1/14/2009 7:38 PM, Anonymous Anonymous said...

"The heightened uncertainty after the credit crunch led firms to postpone investment and hiring decisions."

Please help me out. I keep reading about this mysterious credit crunch, but I can find absolutely no evidence for its existence (except in the mind of Treasury Secretary Paulson). A local Bank of America VP told me in November that they had lots of money to loan, but not many people or businesses borrowing. I read similar anecdotes, but I never read any stories of people or businesses unable to borrow because none of the banks had money. So, what is going on?

At 1/14/2009 9:02 PM, Anonymous Anonymous said...

Dr. T, I am having the same experience. I have just retired and have two banks who are willing and able to lend me money for mortgages. I am not wealthy by any definition so the only thing I can conclude is a) I have a good credit rating and b) I can put up the 20% ( which I did almost 40 years ago for my first house).

So, should I conclude we have gone back to what I and others had to do in 60's and 70's. Somehow, it does not seem all that unusual to me.

At 1/14/2009 9:20 PM, Blogger wcw said...

Shoot me an email if you'd like to put money on this.

Me, I guesstimate the chances of your putting your money where your mouth is here at 0.


Come on, lackwit, make my day.

At 1/14/2009 9:38 PM, Anonymous Anonymous said...

Intrade shows a 52% chance of a depression in 2009. If A chart was provided I would present the findings this way. This is to announce the findings in our most recent chart. As you can see, I am a professional with the requisite white jacket, glasses,
bald spot, five o'clock shadow, and . . . Now, where is that pointer of mine?"
"The main conclusion from looking at this chart to my right, which is on your left, is that the blue rectangles are beating up on the red rectangles." The recession will be over soon.

At 1/14/2009 11:55 PM, Blogger QT said...

Hey, think on the bright side.

We have the most exciting reality show since Survivor. Keynesian economics is to have a rematch. Possible titles: "Return from the ash heap of history", "Survivor Depression",...or ?

Imagine all of the great opportunities for economic research given this new living, global financial laboratory....or potential for $$$$ - books, documentaries, stress counselling, research, online games...this could be bigger than climate change, illegal immigration, ozone holes, peak oil, pandemics...the lot! :)

You may as well laugh as cry. There's nothing you can do about it. Hey, I have Nortel worth 12 cents after today's bankrupcty announcement...factoring in the reverse split that would mean 1.2 cents (note: Nortel has been mismanaged for the last 8 yrs; price was $148.00 in 2000 before the meltdown).

At 1/15/2009 6:30 PM, Blogger Justin Wehr said...

I am saving this post and will re-visit it in a few months.

At 1/15/2009 8:26 PM, Blogger Jack McHugh said...

Agree with the concensus of comments for this reason: The real uncertainty is, just how bad will be the tax, labor and regulatory policies this Congress and this prez will adopt? The range is from "bad" to "we're all gonna die!" Nowhere in that continuum is there room for "animal spirits" to revive, and without those "poor" is as good as this economy will get.

I get so sick of the academic economists who think it's all about numbers and equations. We know it's about incentives and expectations, which are bad and not likely to get better.

At 1/15/2009 10:36 PM, Anonymous Anonymous said...

All this debt being racked up is going to be paid back by the taxpayer in higher taxes and future inflation.

At 1/22/2009 7:08 PM, Anonymous Anonymous said...

Winston Churchill said:"Statistics are like a drunk with a lamppost: used more for support than illumination." ...and I would add "predictions too"!
But optimism is the best way how to live life, so why not...


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