As 2008 draws closer to the finishing line, a worse-than-expected recession is anticipated in the United States.
The latest survey by the National Association for Business Economics (NABE) in November showed about 96 percent of economists believe a recession has started and nearly 75 percent think it could persist beyond the first quarter of 2009. They further projected that the economy will shrink at a 2.6 percent in the final quarter this year and then at a 1.3 percent pace in the first quarter 0f 2009.
The numbers could get worse in 2009. The NABE economists are projecting the economy will jolt into reverse, shrinking by 0.2 percent for all of the next year. If that happens, it would be the worst showing since 1991, when the country was starting to pull out of a recession.
With the economy losing traction, the US unemployment rate will soar to 7.5 percent by the end of the next year, according to the economists polled. Other analysts think it could rise to 8 percent and it could even hit a whopping 10 percent or higher if a US auto company were to go under.
Pessimism aside, let us be realistic about this situation: The US is sinking deeper into an economic hole and it is likely to stay there for a while.
Given the above murky scenario, what options does the government have?
Normally government officials respond to these problems by over regulating the financial industry and providing relief to prevent similar fiasco from surfacing.
Let’s consider the facts: Barak Obama’s bailout package now edges toward $1 trillion; the Fed’s mortgage refinancing scheme to support consumer cash flow; and the economic stimuli by other countries, all of which, I believe, are designed to only reduce the bigger risk of depression and limit the danger of equity and credit prices sliding to new lows.
On several occasions during the year the Treasury and the Fed took on the unusual role of negotiators and principals in merger and acquisition transactions that normally would have been arranged by private parties. As a consequence, the US government has become a major shareholder in banking and financial institutions and other private firms across the United States.
Right now, the US finances have deteriorated too far to balance the federal budget anytime soon. It is the worst-case scenario that, in my views, could seriously weaken the country for a long time in the future.
It is true, however, that serious efforts with numerous incentives were adapted to counter this precipitous deterioration without any substantive success. The prevalent consensus is that they simply ran out of options!
There were several stimulus plans since the debacle of Lehman Brothers and, as we now know, did not work and supplementary funding was needed for the growing number of sick companies. Officials were, in retrospect, clueless and did not recognize that they were dealing with a long-term process of economic and financial restructuring. In essence, the bailout under the so-called Troubled Assets Relief Program (TARP) was not a solution to the crisis but the cause of further collapse.
This year’s third quarter results signaled a further recessionary trend in the overall economic performance that lead to strong downturn revisions in the expected corporate earnings for 2009 and 2010. Consequently, negative earning growth will persist for a considerable time, unless a miracle happens.
Running out of options means keep looking for solutions. A solution to this crisis, that is growing on a global scale, must first address the issue of restoring financial stability and trust in the system and, more importantly, trust in the political order.
The next 12 months will be momentous and the implementation of policies to find a panacea to the economic malaise will be equally critical.
I believe the way we manage our wealth will determine our standard of living for the next decade.
(Habib F. Faris is CEO & managing director of FinaVestment Ltd, London.)
