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Recession Resolution for 2009: Please Go Away -- Fast!

January 1, 2009 By:
Joel L. Naroff, JE Feature
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 Will the recession of 2008 be followed by the recovery of 2009?

What a year! It began with the economy faltering -- and then got worse. There was a financial panic, followed by the disappearance of a number of major financial institutions. Companies cut payrolls every month, the stock market cratered, and the recession deepened.

In other words, 2008 will not be remembered fondly.

The year started with growth declining, causing Congress to pass a fiscal stimulus bill. That gave many of us some cash to spend, which we did. But, once it was gone, so was the economy.

And then the financial sector collapsed. Many of those imaginative sub-prime mortgages disappeared into the abyss of foreclosures. As property values sank, so did the earnings of many of the nation's largest financial institutions. Some of the oldest investment banks in the nation simply didn't make it.

As the credit crisis expanded and markets seized up, the Federal Reserve and the Treasury were forced into the breach. Markets were propped up by government money, and companies were supported by taxpayer largess.

The damage was massive.

Few industries escaped being cut off from credit, and consumers and businesses shut down their borrowing and spending. Confidence hit rock bottom, and the economy slipped into a significant recession. The arbiter of business cycles, the National Bureau of Economic Research, officially declared a recession and indicated that it had really begun in January.

So, will we ever get out of this mess? Of course, we will. Indeed, the recession may end sooner than most expect. A variety of programs are already in place, with others likely to be implemented, and this should ease the downturn and set the stage for the recovery.

The Federal Reserve and Treasury have helped stabilize the financial markets. Although the credit-standard pendulum has swung wildly from too easy to too tight, the worst of the crunch is behind us. The government has stepped in to stabilize weak financial and industrial firms, and stands ready to continue doing so.

Here's Hoping!
The prospect of a massive new fiscal-stimulus program also holds out hope that conditions will start to improve as we move through the year.

Instead of a one-shot income program, President-elect Obama's advisers are suggesting a variety of initiatives. Some will help sustain current spending. But, more importantly, widespread infrastructure spending will help support activity well into 2010.

It is crucial that whatever is done is strong enough and lasts long enough to ensure that we don't fall back into a recession. The ideas being floated seem able to do that.

Finally, there is the wild card -- psychology. Households have replaced irrational exuberance with irrational despondence.

Yet people learn to adjust fairly quickly to difficult situations, and once individuals start believing in the future, they will start spending again.

The combination of monetary policy, government support, fiscal stimulus and improving confidence could start changing the direction of the economy as early as the summer. Although the first half of 2009 will be difficult, with many jobs being lost and the unemployment rate rising sharply, conditions should change during the second half of the year.

I would not be surprised if when I write my annual review and outlook next year, the economy has rebounded sharply.

Happy New Year! 

Joel L. Naroff, Ph.D., is chief economist for TD Bank.


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