Residue of the Great Recession

December 23, 2009

Drummond– Don Drummond is Chief Economist at TD Bank Financial Group. The opinions expressed are his own. –

The Great Recession is over in North America.  But repair will be a slow work in progress and great risks remain.  Many of these risks are centred on policy matters.  The recession shook our understanding of some policy matters to the core, leaving more questions than answers.

The Great Recession produced deep output and employment losses in many countries, certainly including Britain and the U.S., but also an unprecedented degree of synchronization around the globe. 

That synchronization produced the first annual output loss for the global economy since data began in the early 1960s.  Fortunately, we are also seeing synchronization in the recoveries, to the point that global output should rise about 4 per cent in 2010. 

The tighter degree of synchronization of cycles is likely a permanent feature of the global economy going forward.  In part, it reflects unprecedented co-ordination of policy responses.  International policy co-ordination could help promote growth and reduce the severity of cycles if the group-think reflects wisdom.  But errors could have magnified impacts of taking almost all economies down.  Much is at stake.  But much is also in question.

The Great Recession shattered an emerging smugness in monetary policy circles that keeping inflation low and stable would at least dampen cycles if not eliminate them.  At best one can only say now that controlling inflation is a necessary but not sufficient condition for economic stability. 

Monetary authorities, above all in the UK and the U.S., produced shock and awe with the breadth, depth and rapidity of their actions in driving down interest rates and injecting liquidity and capital. 

Their actions have been key to containing the recession and getting economies growing again, but they still have a daunting task before them in removing the extraordinary stimulus.  Too fast and they will kill the nascent recovery.  Too slow and they will risk inflation.  Surgical precision will be required to navigate between the two risks.

The Great Recession taught that great harm that can be done by regulatory neglect.  Lax regulations on mortgages and insufficient capital of financial institutions proved a toxic mix that undid the economies of Europe and the United States but also shot down many others, such as Canada, in the collateral damage. 

Efforts are underway on a collective basis, such as through the G20, and in individual countries, including the UK and the U.S., to address the regulatory oversights.

Great uncertainty shrouds the processes.  Will the global bodies be able to hit the Goldilocks spot?  Tight enough regulatory control to prevent another catastrophe, but not so tight that credit is choked off, impairing the recovery.  And will individual countries cede to the broader regulatory movement?

Most countries bucked the conventional wisdom on fiscal policy and introduced massive stimulus.  There had been a fairly tight consensus prior to the Great Recession that fiscal policy was not very effective in combating cycles. 

It typically impacted economies too late but left a gigantic debt head-ache that went on long after economies were recovering.  But it was argued that these were extraordinary times, calling for extraordinary measures.  So the clarion call was for all countries to implement fiscal stimulus packages amounting to at least 2 per cent of GDP. 

The stimulus has had a limited impact in lifting economies out of recession.  Particularly in the case of infrastructure spending the economic impacts are still largely to be felt.  But the deficit and debt impacts are sure registering.  Everyday news hits of another country being forced to face the necessity of doing a fiscal about face. 

Few face more pressing fiscal problems than the U.K. and the U.S., where, respectively, debt-to-GDP ratios have soared to over and almost 100 percent.  These will not be easy to address, especially with the explosion in health-care spending.  The verdict on the fiscal policy reply to the Great Recession cannot be rendered for a few years, to see if countries are still drowning in the sea of debt caused both by the economic cycle and their own actions.

The Great Debate on the Great Recession cannot be necessity be put to bed any time soon.  This is the recession that will unfortunately go on giving, both in terms of a sluggish recovery and continuing policy challenges.  How the policy authorities respond to the aftermath of the recession will need to be seen before proper judgement can be applied to their actions during the crisis.


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Yes Yes but like many you are still trapped within the current known parameters of perceived economic reality and Values both real and linguistically. The facts are that money is ONLY a tool . Hence you currently have only a choice of two as a perceived balancing act “”””Too fast and they will kill the nascent recovery. Too slow and they will risk inflation.””””” choice of two is always Childish and not adult. Economics is an infant in nappies and has not grown up. VALUE and value systems are the problem and the childish notion that the market will know what Value is, is itself nonsense. Fair enough pre the telegraph or Rothchild pigeon to have an automated invisable hand of slavery, but as Freidman said what about Quitting the Tyrany of the status Quo ( here we go-o rocking all over the world ) Or as Gailbraith put it Gailbraithian forest. And why should some countries miss out of the Lolly scramble that was cemented in place 350 years ago out of bad luck as to their non legal existence at that time. You ignore Samulson and some matters about definitions of Weath. THE SAD fact is that the Planet has Two approximate choices. BAN the Robot tractor and hence have meaningless employment work for all. Or keep the ROBOTS and Robot tractor and Pay ALL humans NOT TO WORK. The current Set of supposedly self balancing economic equations are predicated on supposed cost of Labour and capital of one nation locked in a Relativity set against others. With new architecture and horizontal floors added to shore it up to those lucky enough to have access to authorised new structural derivatives entities and vehicles that with insuring and reinsuring the placement of risk and hedging plus some arbitrage can turn perception of a liability into a Pacioli asset of endless sampling between the left and the far right and supposable search for VALUE in between the choice of TWO. Which witch whitch To achieve escape velocity from your concern of inflation and to render inflation irrelevant can be achieved by updating economics to be relevant in the post telephone and Post industrial Pudding age to Quote chuckle Reginald Perrin. Perhaps a cathartic apology by England to the planet for failing to know what to do with MR Stevens work machine and unnecessary unemployment and LACK of work for man that ensued and a Further apology for not apologising earlier would be helpful. What’s required is to insert a Coefficient into the economic equation Pond that will nullify inflation into irrelevancy. And point the finger of blame at the Two groups responsible for engineering and building a World in direct opposition to the Father of economics ARISTOTLE himself and his bucket of Water. AND Malthus who told us not to marginalise the utility of said Aristotelian WATER and resources generally. THE coefficient I refer to is that of HUMAN Rights. And chuckle as a matter of preference I prefer to pass my own Water.

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Drummond: You think this Recession is over? And it’s taught us the harm of regulatory neglect? How about the Clinton banking regulation of July 1, 1995 that required banks and S&Ls to give 20% of their loans to the lowest 20% income people in their area? How do you ‘regulate’ that regulation? It led to millions of risky loans to buy homes with no downpayments. It started an incredible real estate bubble in the U.S., which led to the toxic loan packages being bundled up and sold, to avoid being the last to hold the junk.

And recession over? Do you really think that a 1% increase in GDP, caused by MASSIVE govt overspending/borrowing from future taxpayers, means that the private sector is out of the recession? I think you need to check your math, as most economists should, to figure out how the private sector GDP is actually performing. It is SERIOUSLY troubled, and massive govt spending will only make the situation worse when the govts can no longer afford to issue debt and/or print more money to sustain the illusion of a healthy GDP number. Our leaders are Keynesians at the absolute WORST time to be Keynesians……..when taxes and the “govt sector” are already WAY too large.

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