Our analysis is that the overall economy, outside of housing and the financial sector, was not in recession prior to September, and would probably have avoided a recession altogether had certain steps (such as the removal of mark-to-market accounting) been taken.
The economic data available from the Federal Reserve for 2008 reveal quite clearly that the conventional wisdom about the causes of the current recession misses the mark, and that what actually took place was a financial panic, which ultimately dragged the rest of the economy down with it.
For instance, one conventional explanation you hear constantly on the financial media is that we are in the midst of a "credit crisis." The above graph from the Federal Reserve showing total bank credit, however, clearly indicates that total bank credit for the past ten years has been growing at a rather robust pace, and that even during the most recent "recession" (shaded in gray and corresponding to the NBER's identification of the recession's start in November 2007), total bank credit has actually increased quite sharply. (Click on any of the graphs to see them in greater detail).
Another common assertion in the media is that "banks won't lend" right now. However, as the chart above showing commercial and industrial loans at all US commercial banks further indicates, the current level of bank lending to businesses has grown sharply in recent years, and is only down a very small amount since the start of the current recession (top right red circle). In fact, if you look at the two previous recessions (larger red circles), you will see that commercial and industrial lending dropped much more sharply then than they have in this supposedly historic current recession.
Lest the reader object that commercial and industrial loans might be holding up, but that banks have really been refusing to loan to the consumer, the above graph showing all consumer loans (individual loans) identifies that the level of consumer lending continued to climb unabated throughout 2008, to levels unmatched in any of the previous sixty years.
Even real estate loans, which you would think would show a marked reversal based on the reports you hear from the financial media, shows a similar pattern, as the chart above showing real estate lending at all commercial banks displays.
However, something clearly did take place which threw the economy into a recession in the fourth quarter of 2008. We maintain that the "something" was a financial panic, the likes of which the country has not seen since the financial panic of 1907.
Unwise lending practices (some of it encouraged or even mandated by the government), dangerous levels of leverage, and the unintended consequences of the increased scope of mark-to-market accounting and the removal of the uptick rule for short selling started a chain reaction that led to the collapse of Wall Street firms like a line of dominoes beginning on September 15.
Data on manufacturing, shown above for the year 2008 in the form of the Institute for Supply Managment (ISM) manufacturing index, clearly indicates that manufacturing was cruising along at a generally steady level throughout most of the year, until it took a steep dive beginning in September (red circle in the above chart marks the beginning of September 2008). This reinforces the thesis that we are in a recession that was caused by a financial panic, rather than another Great Depression.
There was a very clear distinction between the financial panic of 1907 and the Great Depression. The panic of 1907 was a banking panic, and it also had its causes in financial speculation which got out of control. It passed fairly rapidly and has largely been forgotten.
The Great Depression had much deeper systemic causes, and economic readings of the broader economy during that crisis reflected much more catastrophic problems than the charts we are seeing for 2008.
It is our contention that the environment today is much more akin to 1907 than to the Great Depression, although saying "the most serious panic since 1907" will never sound as newsworthy as all of the "worst . . . since the Great Depression" lines that you have been hearing every day for the past year.
For later posts discussing this same topic, see also:
- "Managing Investments in the New Era" 02/18/2009.
- "Dangerous media distractions" 07/07/2009.
- "Repeal what remains of the misguided stimulus" 09/01/2009.
- "The end of 2009" 12/30/2009.
- "Was the decade lost?" 01/14/2010.
- "Great minds think alike!" 03/19/2010.
- "Glenn Beck is an economic butterbar" 11/04/2010.
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