The D-word: Will recession become something worse?

TOM RAUM and DANIEL WAGNER, Associated Press

Writers

WASHINGTON – A Depression doesn't have to be Great

— bread lines, rampant unemployment, a wipeout in the

stock market. The economy can sink into a milder

depression, the kind spelled with a lowercase "d."

And it may be happening now.

The trouble is, unlike recessions, which are easy to

define, there are no firm rules for what makes a

depression. Everyone at least seems to agree there

hasn't been one since the epic hardship of the 1930s.

But with each new hard-times headline, most recently an

alarming economic contraction of 6.2 percent in the fourth

quarter, it seems more likely that the next depression is

on its way.

"We're probably in a depression now. But it's not going to

be acknowledged until years go by. Because you have to

see it behind you," said Peter Morici, a business

professor at the University of Maryland.

No one disputes that the current economic downturn

qualifies as a recession. Recessions have two handy

definitions, both in effect now — two straight quarters of

economic contraction, or when the National Bureau of

Economic Research makes the call.

Declaring a depression is much trickier.

By one definition, it's a downturn of three years or

more with a 10 percent drop in economic

output and unemployment above 10 percent. The current

downturn doesn't qualify yet: 15 months old and 7.6

percent unemployment. But both unemployment and the

6.2 percent contraction for late last year could easily

worsen.

Another definition says a depression is a sustained

recession during which the populace has to dispose of 

tangible assets to pay for everyday living. For some

families, that's happening now.

Morici says a depression is a recession that "does not

self-correct" because of fundamental structural problems

in the economy, such as broken banks or a huge trade

deficit.

Or maybe a depression is whatever corporate America

says it is. Tony James, president of private equity firm

Blackstone, called this downturn a depression during an

earnings conference call last week.

The Great Depression retains the heavyweight crown.

Unemployment peaked at more than 25 percent. From

1929 to 1933, the economy shrank 27 percent. The stock

market lost 90 percent of its value from boom to bust.

And while last year in the stock market was the worst

since 1931, the Dow Jones industrials would have to fall

about 5,000 more points to approach what happened in

the Depression.

Few economists expect this downturn will be the sequel.

But nobody knows for sure, and nobody can say when or

whether the downturn may deepen from a recession to a

depression.

In his prime-time address to Congress last week,

President Barack Obama acknowledged "difficult and

trying times" but sought to rally the nation with an upbeat

vow that "we will rebuild, we will recover."

The next day, Federal Reserve Chairman Ben Bernanke

told the House Financial Services Committee that the

"recession is serious, financial conditions remain difficult."

He held out a best-case hope that it might end later this

year, with "full recovery" in two to three years.

Despite the tempered optimism, the economic outlook

remains grim. Consumer confidence has fallen off the

table, stocks are at 12-year lows, layoffs come by the

tens of thousands, and credit remains tight.

The current downturn has many of the 1930s

characteristics, including being primed by big stock market

and real estate booms that turned to busts, said Allen

Sinai, founder of Boston-area consulting firm Decision

Economics.

Policymakers and economists note there are safeguards

in place that weren't there in the 1930s: deposit

insurance, unemployment insurance and an ability by the

government to hurl trillions of dollars at the problem, even

if it means printing money.

Before the 1930s, any serious economic downturn was

called a depression. The term "recession" didn't come into

common use until "depression" became burdened by

memories of the 1930s, said Robert McElvaine, a history

professor at Millsaps College in Jackson, Miss.

"When the economy collapsed again in 1937, they didn't

want to call that a new depression, and that's when

recession was first used," he said. "People also use

'downward blip.' Alan Greenspan once called it a

'sideways waffle.'"

Most postwar U.S. recessions have come after the Fed

has increased interest rates to cool down rapid economic

growth and inflation. Later, the Fed lowers rates and helps

restart the economy, with the housing and auto sectors —

both sensitive to interest rates — leading the way.

This time is different: As Senate Banking Committee

Chairman Chris Dodd, D-Conn., said, "Our housing and

auto sectors are leading us not out of recession, but into

it."

What's more, the Fed no longer has the ability to kick-

start recovery by lowering interest rates. The central bank has already effectively lowered the short-term rates

it controls to zero.

And there are no guarantees the massive economic

stimulus package and series of bank bailouts will stave off

a nightmare recession, or worse.

"It is certainly plausible that the kinds of policy measures

that have been good enough to tame the business cycle

are no longer adequate in a fast-moving, highly leveraged,

highly networked economy," said Anirvan Banerji of the

Economic Cycle Research Institute.

Today's economic indicators don't project a depression.

But Banerji is cautious. Economic data in 1929 didn't

show that the stock market crash was about to lead to

years of economic misery, either.

"It did not look like the kind of plunge that would be a

depression until after the recession began," Banerji said.

"The Great Depression didn't start out as a depression. It

started out as a recession."

The depression that consumed most of the 1870s and

followed something called the Panic of 1873 makes a

better comparison to what's happening now, said Scott

Nelson, a history professor at the College of William and

Mary.

Financial markets had become centrally located by the

1870s, notably in London. And nations had not yet

enacted the protectionist trade policies that were in place

by the 1930s.

The results were not exactly promising. Gangs of orphans

roamed city streets as men moved west to pursue cattle

industry jobs. Widows struggled to make money by

serving unlicensed liquor. Thousands of workers, many

Civil War veterans, became transients.

The downturn lasted more than five years, according to

the economic research bureau — four times as long as

what the United States has endured so far in this

downturn.

Today's recession is already longer than all but two of the

downturns since World War II. But for now, public officials

are being extremely cautious about the D-word. Alfred

Kahn, a top economic adviser to President Carter,

learned that lesson in 1978 when he warned that

rampaging inflation might lead to a recession or even

"deep depression."

When presidential aides asked him to use another term,

Kahn promised he'd come up with something completely

different.

"We're in danger," he said, "of having the worst banana in

45 years."

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