A Great Recession?

Sydney M. Williams

Thought of the Day

“A Great Recession?”

February 12, 2010

The current environment has become known as the “Great Recession”, with the pundits borrowing the words from FDR and the Depression that wracked our Country eighty years ago.

Wordsmiths are hired by administrations to provide names they hope become immortal to describe the great tribulations Presidents undergo, or the programs they father. The New Frontier described the youthful Kennedy and his administration, which after his death became known as Camelot; Johnson’s was the Great Society. Reaganomics has entered the lexicon as a word meaning reduced regulation and smaller government. Presiding over recovery from the “Great Recession” would add prestige to Mr. Obama’s presidency.

It could be that we will experience a double-dip recession; economists such as Nouriel Roubini of NYU expect such an occurrence. I don’t pretend to know, but at this stage the situation is not nearly as severe as the recession of the 1970s and early 1980s. The current period, though, had the prospects of being far worse. The credit crisis which erupted in August 2007 and reached its apogee in September-October 2008 threatened to undo capitalism as we know it. While Monday morning quarterbacks abound, along with their back-seat driving brethren, there is little question that the speedy response of Henry Paulson, Ben Bernanke and Tim Geithner saved our financial system from what could have been a catastrophe.

With the benefit of hindsight could events have unfolded more smoothly? Did Paulson and crew mislead or fast-talk Congress in their attempt to get $700 billion for TARP? Should Ken Lewis have been more forthcoming with shareholders regarding the Merrill acquisition? Did Goldman receive more for their credit default swaps from AIG than they should have? There are hundreds of questions like these and the answer to most of them is “perhaps”, but time was not on the side of those who fate had placed at the scene in the fall of 2008. The interlocking nature of finance means that banks are like a series of dominoes. You knock one down and the others collapse.

Congress, as responsible as any entity for the cause of the crisis, will, in its inimitable fashion, conduct full hearings and investigations aimed primarily for publicity and only incidentally at getting at the truth, as long as the answers is not self incriminating. I believe in taking responsibility for one’s actions, so seeking truth should be encouraged, but I fear the bloviating blowhards in Congress are more likely to provide entertainment than facts.

But what should be important to all of us is that what could have turned into a destructive depression did not and for that we owe thanks to both the Bush and Obama Administrations and to those who served them. It could be that Professor Roubini will be right and/or that the situation in Greece proves contagious and credit markets tighten again. Spreads between 10-Year Treasuries and Investment Grade Corporates have widened by about 24 basis points since year end, as has the TED spread, enough to warrant a cautious eye, but not so much as to cause concern. It seems to me more likely – and it is certainly my hope – that this will not prove to be the “Great Recession”; if that proves to be the case we should give thanks, and not look to assign blame.