You see, it seems that every CEO, Politician and Economist out there is going out of their way to note that even though the similarities exist between today's Wreck-Onomics and the Wreck-onomics of past crises, we will avoid a depression and most likely only have a minor recession.
Let's recap:
Subprime Crisis - Only contained to subprime
Ooops... well what we meant to say was that hybrid option arm and negative amortization loans to borrowers with prime credit are lumped into that, so it may spread, but no further.
Home Prices - apprecation will slow to a more normal level, but not go negative.
Oooops... well... of course in areas where the appreciation was abnormal the resulting depreciation will look negative, but the homes will remain above their original value and will most likely be contained to small geographical areas.
Ooops... well.... what we didn't realize at the time is that almost 50% of the new homes built were speculative buys, and once those people exited the market it would drag new construction down like a body in the Hudson chained to cinder blocks.
Ooops... looks like this is spreading into the prime sector... now we need help.
Ok... I could go on and on (and usually do), but I think you get the picture.
Here we have another article from a global economist touting the possibility of a depression. This being the most bearish so far... but the shoes are still dropping...
Bold is my emphasis, italics my add.
"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.
"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday. In other words, we've got a tremendous bubble that has burst, and the only way we can save ourselves from depression is to either skyrocket our already volcanic deficit, or artificially inflate our markets, creating another asset bubble. Isn't this how we got into trouble in the first place?
"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said. The government may have to play the market? This is a horrifying thought.
While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today. Here's the "feel-good denial phrase".
The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said. Sound familiar?
Then, investors were very optimistic about new technologies, and stocks rose against a backdrop of low inflation, and a trend toward globalization. There was even an equivalent of the modern day subprime mortgage debt meltdown in the form of U.S. loans to Latin American countries which had to be written off.
"The big difference is the attitude of central banks and specifically the attitude of the Fed," Connolly said.
However, Fed rate cuts alone are unlikely to avert a prolonged period of economic weakness because the danger still exists that a burdened banking sector will choke off credit to consumers and households. This is already happening, and in a big way.
"The Fed probably can't fix it all on its own now," Connolly said. "There is a chance the Fed gets forced into unconventional cooperation with government," which could involve buying a range of assets to reflate their value. That's right, folks. Let's artificially inflate assets once again. My god... if there was ever a case for Wreck-Onomics, this is it.
That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.
Either way, investors face bleak prospects now without some kind of further government intervention, he said.
Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets. He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.
Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.
"If we don't avoid depression, the only thing worth holding is cash," he added."
My point, exactly.
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