The economy

A thoroughly modern recession

The current recession fits the pattern of recent ones—but is likely to last longer

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Readers' comments



For NBER chairman Hall to talk about "mystery shocks" is a little strange to say the least. What’s so mysterious about people with too much debt defaulting on mortgages?

Should we wait for people to go bankrupt before we say that they have too much debt? Should we wait till asset prices collapse before we say it was a bubble?


After the runaway credit train hit the mountainside in August 2007, I started going thru my back-issues of the Economist back to March 2007 to see if your paper had sounded any clear warnings of impending doom. Other than UBS and Bear Stearns running into problems in March and June respectively, there was little or no discussion of the possibility of a crash. To be fair, the Economist has done an excellent job of explaining what happened after-the-fact, from many different angles, and in exploring the disaster’s profound ramifications. That said, I believe your readers are being short-changed by articles such as "A Thoroughly Modern Recession which states that "the paradoxical truth may be that the less volatile business cycle encouraged investors to take bigger risks with borrowed money, driving asset prices too high and ending in damaging busts", as if this is some new observation. It would seem that the writer is unfamiliar with the work of the late Hyman Minsky (even though Pimco’s Paul MacCauley often refers to Minsky in articles and interviews), to say nothing of the classical pre-Keynesian economists. Why is it that the current disaster seems to be a surprise to Keynesian and Monetarist (anti-recession) students, but not to classical and Mynskian students? Indeed, this latter and decidedly minority group has been condemning the policies of the Fed since at least the mid-90s, such as Greenspan’s refusal to adjust margin requirements in the dot-com bubble. To what extent did the Economist give them a voice?

lev. d.

the slump is the result of the capitalists expropriating the surplus value (profit) from the workers. now, the head of the auto companies fly in on their private jets to beg for public money to save their business from collapse!!!
the reason their business is in trouble, is because the capitalists have stolen the wealth produced by the workers.
by attempting to "rescue" the whole capitalist system, the ruling class are creating a frankenstein monster! only socialism-reflecting the world socialised economy- can take society and the productive forces forward.
workers unite!


The current recession seems to be comparable to the 91 event only to the extent of its severity.
Ever increasing consumption levels with corresponding increases in household debt have been the main reason for GDP growth since the mid 90s. 75% of GDP is consumption driven in the US. Western Europe is not far behind.
The biggest problem is finding new ways to generate growth when the old ways are maxed out. There is no room left for credit growth and productivity gains in recent years have been minimal.
Policy makers are going to find the options for creating productivity growth unpalatable. Freer trade with less barriers would encourage more efficient production yet this would decimate large parts sectors of many economies. Western Europe in particular would have large parts of their manufacturing and agricultural sectors decimated if trade rules were liberalised.
European politicians such as Nicholas Sarkozy will oppose trade liberalization. Barack Obamas pronouncements to date do not suggest he will support free trade either.
The current recession should be over in a year or 2 given the fact that unprecented stimulus will be pumped in by the various reserve banks.
What happens after that is the issue.

Charlie Gant

The main obstacle to explaining away this latest recession is that the variables and prevailing world economic environment are substantially different to before. How could one realistically compare 2007/08 to the 1920s and thus arrive at an answer? Indeed, the world economic landscape today bears no resemblence to that of the most recent recessions in the 90s, 80s and 70s.

A good start would be to consider the possibility that even the most renowned economists are not incapable of the most ridiculous utterances. How is that none of the economic sages reference the fact that there has been an enormous shift in the world economic model? No mention of China, India, Brasil (all of which are forecast to grow next year at around 7,6 and 4% respectively)?

Nor is there any mention of the socio-economic factors influencing the dynamic. In terms of the United States, the country has matured and stabilised. There has been an enormous socio-economic shift in the US and this has direct consequences for the economy. It is ironic that in this year, which just screams change, the policy makers do not attempt to understand the ramifications of such change. Without wanting to be facetious, too much has been made of celebrating change without actually understand the underlying causes and consequences. On this subject my point is: it is assumed that on January 20th. the United States will commence a period of change, however, it is because change has already occurred that Obama will enter the White House early next year.

Regarding Europe: while the United States has matured, Europe has grown old (literally). The populations are now decreasing and the populations ageing. For European policy makers, that would be a good place to start their analysis.

The economic expectations of North Americans and Europeans far exceed the realities of their economies. The hard core organic growth is to be found in BRIC and peripheral economies. Additionally, productivity and innovation have ground to a halt. In the case of the latter, R&D and commerical exploitation of such is more feasible outside the US and Europe, where core costs are too high.

The cause of this latest economic crisis (the second of this decade) is because policy makers and economists have failed to consider the new world economic dynamic, a different socio-economic / demographic environment in their "domestic economies", unsustainable lifestyle expectations, falling productivity and lost competitiveness. Instead, they have advocated throwing money at the problem (limitless equity in the late 90s and cheap credit in the 2000s).

To find a solution it is always a great help to understand the problem and its causes. Exhaustive comparisons with the past, while titillating and intriguing, are futile and not too relevant.

I am a big fan of Obama. I welcome his presidency. However, his rallying call for change suggests that he is unaware that the change has already occurred. Instead of seeking even more change, he should first strive to understand what has already changed. He of all people should be in a position to appreciate this. Mind you, politicians do not have a good track record with the obvious.


I'm a little surprised the article didn't include anything about a legal system in the U.S. that assumed C.E.O.s would "do the right thing." I mean, it's obviously not the root cause, but a lack of personal interest in the fate of one's own investing firm has to count for something, right?


Clearly this whole situation was caused by the fed holding interest rates much to low for much too long essentially sind the 9/11 attacks. That in addition two fannie mae and freddie mac repackaging loans at an alarming rate and encouraging lenders to extend loans to almost anyone. This produce asset bubbles in real estate and the commodity markets. This is a form of inflation and has distorted the American economy significantly. The problem isn't deregulation, it is government mis-intervention. As much as I admire Alan Greenspan and can't help but recall how many times he said "Rising home values continue to bolster households ability to borrow and drive the economy" or something like that. This isn't a capitalism problem, this is a government problem. To me it is amazing that anyone even beleives in socialism. I'd rather have an elite ruling class of C-level employees, bankers and politicians who make too much money and are subject to intense public scrutiny, but actually have something to do with wealth creation than a bunch of government beuarocrats who only know how to spend money.

The Seeker

It's not a problem with Capitalism. It's a problem with the deregulated capitalism of the Bush and Blair years. It is actually capitalism that has been hijacked, so an Either/Or discussion is not really very instructive. And read the following:Bosses of bailed-out US banks waive bonuses (Guardian, 09/12/2008)• Merrill chief abandons reported $10m requestGoldman Sachs, which shared a record $18.8bn bonus pool last year, has taken steps to head off a PR furore over pay this year after receiving $10bn from the Tarp. Its top executives, braced for bleak fourth-quarter earnings, have asked the bank's compensation committee to scrap their bonuses for this year.Yes - 18.8 billion - that is 18.8 thousand million dollars for one year. If you notice the irony, that is actually more than the 10 billion dollar bailout that they received. Now ask where your money went, since the financial industry does not actually produce any wealth - it simply moves other people's around, and it appears, mainly into their own pockets.


"Capitalism is the worst economic system except all those others that have been tried from time to time".Winston S. Churchill, I believe?


My reading of the US economic tea leaves is one of deep and persistent recession, much as Japan experienced from the late 80's and most of the 90's. If not worse than Japan, in that at least the Japanese individuals had high levels of savings. All you need to look at housing and the auto industry to see that this is not some blip on the screen.
House price fallings and mass sackings have had a huge psychological impact on the American psyche. People have stopped spending money, even those with money and jobs, this means even more jobs will have to go which in turn breeds more pesimisim.
The US has some major Structural changes to make. It needs to look to what European manufacturers have done, tuirn from basic goods to high end goods. It cannot compete with China in making cheap goods, instead has to focus on quality and getting american consumers used to higher prices. US Car manufactuirers currently don't compete with europe and Japan on quality and innovation inc ars but can't compete on price with Korea and soon China. A drastic rethink of what and how they produce cars and where is needed.
Bubbles are bubbles and will always burst, a lot of people have learnt a lesson that should not have needed re-learning but we where told not to worry as this reflected the 'new economy" and somehow this growth would go on and on adn wasn't really a bubble, well that bubble has burst along with the economic one.
Lev.d, you so funny or is that just wishful thinking. Capitalism isn't dead, it is still the most effecient mechanism, however that does not mean there should be no regulation or oevrsight. greed is the killer, socialism/communism never destroyed greed just transfered it to different people for different greed. Look at Hugo Chavis' "new bolivarian solicalism" no thanks.

Old Collegian

The 12 month recession in the US is most likely to be longer and deeper than those of the 1970s and 1980s. The cause, of course, was directly attributable to imprudent and excessive lending by cashed-up financial institutions to clients who lacked the ability to service their loans in a market that was woefully under-regulated. The central focus of the incoming Obama Administration and of the Congress will be financial stimulus measures, trying to revive a faltering economy. As the Cook Political Report argues, the new mantra will not be "let the markets work" but rather "regulate first, relax rules later." The US is facing its worst economic crisis in decades and corrective measures will need to be stringent and long term. It is the misfortune of President-Elect Obama to have raised so many hopes for a new beginning for America only to be confronted with a calamity that could absorb most of his first term as President. The measure of his success will determine whether he wins a second historic term.

lev. d.

it is no accident, that the revolutionary developments in greece and elsewhere, are taking place when world capitalism is teetering on the brink of the abyss... "recession..." get a grip of yourselves! those who the gods would destroy-they first make mad.
read trotsky "history of the russian revolution" prepare yourselves. great historical events impend.

Working Man

Hopefully this mess does start looking up mid 2009, as the article claims. It could get worse, if the low saving rate of Western Nations (especially America) causes nations to run out of ammunition before the recession is defeated.

But lets be hopeful and ask: What about the day after?

In the crises of the 1980s we all learned a bit on the dangers of inflation & stagflation, and central banks were focused since on mitigating these as their prime objective.

Instead of throwing away babies with the bathwater, lets remember this was actually an extremely serious problem back then - and the system succeeded in solving it!

Yet one may have too much of a good thing. So much so that any other suggested objective was considered by purists as a mistake. May one point to many articles in the Economist to corroborate?

Anyway what do we learn from these "modern" recessions?

- enforce transparency in the Economic system. This means firm laws against opaque derivatives and opaque offshores, with appropriate legal punishment for breaches.

- The global banking system must be legislated and enforced to be transparent. International treaties and country legislation should be put in place for this.

- Money can and should move around the world (Globalisation has had benefits in eradicating poverty), but only among transparent institutions that obey these rules. Transfers should only be allowed between such institutions.

- (This will also help on other issues - like controlling the whitewashing of criminal funds; but that is another story)

- Central Banks should support all of this with a new policy goal (in addition to fighting inflation). To wit: ensure transaprency of risk in the system by setting interest rates to reflect these risks. Interest rates should be set high when the economy is overheating - mild slowdowns are preferable to recessions.

Surely these are just ideas - yet the Economist could do a useful public service by starting a running discussion on the "right way to do capitalism".

The Seeker

I think this article is a bit disingenuous. "Low inflation"? House prices in London quadrupled in the last 10 years, and yet the UK claim inflation rates of 2 or 3 percent due to the basket of products on which this is based, low rates being not due to "good control" but the flood of cheap Chinese manufactured goods which appear to have an uncommonly heavy weighting, given the numbers. How is the fact the ordinary people and the young can no longer afford housing, a basic necessity, not relevant to inflation. This should have been controlled by higher interest rates very early on. Unfortunately, it behoves governments to lower these rates to allow a housing bubble as this leads to short term feelings of increased wealth and well-being by the section of the public who own property, and therefore the ruling party's popularity as people then borrow on their houses to consume, therefore stoking the economy further. This has been the case for most of the West from the UK to the US to Ireland to Spain. AND NOONE THOUGHT TO CONTROL THIS, NOT THE OMNISCIENT ALAN GREENSPAN, OR GORDON BROWN, WHO WAS FETED FOR PRODUCING THE UK'S "ECONOMIC MIRACLE", and now, somehow is gaining a boost at the poles for appearing to have leadership qualities because he appears to be taking the lead in spending his way out of a crisis he was instrumental in producing through his policies?Housing bubble in the US: the problem was lending to people who had no way of servicing the loans long term, apparently to create more debt which could then be insured against through the creation of "Credit Default Swaps", which were not controlled because they were disingenuously termed Swaps rather than insurance (against the failure of the borrowers) in order that it would not be regulated by the stringent rules that regulate the sale of insurance policies; the creation of this debt was apparently not just for the income from short-term interest from the loans, but because new debts were needed to generate the Swaps which were so profitable for the financial companies to bundle and sell, and many of which are less than worthless due to their liabilities, a fact of which financial company bosses were surely completely cognoscente, but ignored as they went after hundred million dollar bonuses. This process has hollowed out the banks and financial institutions which bought into products bundled with these derivatives, hence the vast Western bailouts which amount to over a trillion dollars - taxpayers are still paying for those vast commissions and bonuses now, and will be for many years to come.This is the cause of the recession, as the banks collapse under the weight of worthless instruments. And the full impact of this is not yet apparent. Now, this fiasco is affecting the real economy.I find it hard to believe that the regulators and the Bush and Blair governments were not aware of all this as it has been obvious to many people while it was going on. They deregulated on purpose, and tried to force third world countries such as China to do the same to stoke the profits for a few very wealthy individuals. It is of a piece with the lies to start the Iraq war, where Haliburton (Dick Cheney connection) got more than 30 billion dollars in government supply and reconstruction contracts without having to put in a bid, and oil prices went up from around $20 to $140, to the glee of Big Oil and Bush's Texan friends. The comments that the war was started to ensure US energy security is just a smokescreen for the private pillaging of the American, and the Western economies in recent years by financial and big money interests in a financial-political nexus. Tony Blair made over $20 million dollars in the first year of his "retirement", from well-paid speeches to American Financial institutions, amoung other things. Think about that. Politicians are now hand in glove with big business, either because they are dependent on them for campaign contributions, or stand to gain massively after they leave office from speech tours and directorships and work for lobby companies (if they do not come from the very families with the financial interests to begin with, viz the Bushes). It is about time the public woke up to this fact, although I doubt we will get many articles on this with any depth of investigation as the Western press is also controlled by a few wealthy individuals. Maybe Obama will change things? Maybe there is hope - if the final reckoning for this present fiasco doesn't finally sink the financial and economic system as we know it, and plunge society into a disaster we have not even begun to acknowledge is a possibility.

J. Kemp

Who caused the past two recessions? The "thoroughly modern", greed-stricken investment banks. No mystery there at all.


In my humble opinion, current low interest rate will end in a few years. We will see high inflation, maybe 20% inflation soon. The current government accumulated deficit is 11 trillion dollar, and the current bailout is 9 trillion dollar (according to the tally of Bloomberg news and Yahoo Finance). Government deficit is approaching 1.2 trillion in 2008; it may be higher in 2009.

Here is the reason I see why the dollar is strong recently.

A secret offshore company called "ABC Offshore Ltd" can place bets on financial vehicles defaulting and get "insurance on the failure", and the only thing the desk manager knows is that when the insured party defaults, the payment gets transferred to a numbered account, which is also secret.

To open an account through the British Virgin Islands (BVI) financial services Commission, one only needs to wire 500 bucks a year to the registrar to keep a "good standing" and $1,500 to $3,000 to a lawyer called a "Registered Agent".

Under BVI law, the company reporting requirements are limited to the name of the company, year of incorporation, company number, and registered agent. Under law, the company's directors, shareholders, employees, financial statements, what they do, and where they do it are completely secret.

An entity may register and do business anywhere in the world, except where the company is registered. It is estimated by the Suisse that most of the 70 trillion in Credit Default Swaps originated from companies in the Caribbean.

All of these CDS agreements are PRIVATE, and they are all priced in dollars. This is why the dollar is king right now. There is less demand for hard assets and commodities, because they are not as liquid.

The reason the dollar gained 25% in three months is because other currencies are failing, and banks are off loading their hard assets at fire sale value to get short term dollars to pay off these "default bets".

They are selling quick because they couldn't see what was coming. The short sellers (buyers of CDS "insurance") are secret individuals. You could be a desk manager at Lehman and have an offshore entity placing bets on your "own" company".

The architects of subprime are based in the Caribbean, but you will never identify them. They sold banks the MBS/CDO (note: MBS is Mortgage Backed Security, CDO is Collateralized Debt Obligations, CDO is a combination of whole bunch of ABS. ABS is Assets Backed Security, such as mortgages, credit card debts, home equity loans) adjust in two years, because they invented the products.

Transparent investors saw the potential risk, but were attracted by high monthly yield spreads. CDS allows for 100 or more bets to be put on the full value of the default policy, far exceeding what the banks have in cash in case of such a default. The amount estimated this month is 12 trillion, which represents more money than Americans have in checking and savings (7 Trillion).

Its unfortunate that these banks also took the 7 trillion of your money and used it as collateral to take out loans in excess of 70 trillion so they could generate 70 trillion in loans.

The bubble created in Wall Street is 10 times the combined savings and checking accounts in America; the whole world is paying the price for this bubble.

I have not seen any crooks ended up in jail yet? People will have more confidence if the government sending these crooks to jail? Instead of keep on pumping more money to Wall Street? Once people around the world realize the US dollar is losing its value and dumping US dollar, I see bigger problem coming....


The economy is a very complex system, so "causes" of things can be found in many corners, both of the economy or government and of history. The last sentence of the article only muddles the issue. The underlying problem, as discussed earlier in the article, has been that people have been making consistently bad investments for many years. These investments only appear good when people have confidence, but the loss of confidence comes quickly and easily. These problems are actually a political, cultural, and moral crisis in the wealthier countries. Since basic needs have been satisfied, there are intense differences of opinion about how particular goods, services, and labour ought to be valued and produced. This results in wide fluctuations in asset values and employment patterns. The accessory role of central banks is hardly worth mentioning.


The root of the financial crisis is FED. It is representative of Banks instead of an full government agency that represents public interest. "Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by the Senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks." (

As long as FED has interests in private banks, it can not oversee and regulate financial systerm objectively.

Financial industry is so powerful that government can not control it. Instead, lobbyists from Wall Street control U.S politicians. Creating boom and busting it transfer wealth from majority to those top classes. Where is your life saving? It is in someone's pocket. But don't worry, they won't let your blood dry up because they need to suck you in the future.

lev. d.

the poverty of philosophy among the capitalist commentators is quite breathtaking. they speak the same jargon,de-coupling etc (!!!) and this is a result of the brainwashed school system.
the international problem of capitalism, is wage-labour-capital.
marxian dialectics explained for 150 years the sudden and sharp changes to the situation which we have just witnessed in laboritory conditions.
the union leaders must take the lead in advancing the cause for socialism... the inevitable next economic stage...
workers unite!



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