SMC Economist Warns of an 'Epic Recession'

On the 79th anniversary of "Black Tuesday" - the stock market crash that precipitated the Great Depression - SMC economist Jack Rasmus said the 2008 economic downturn has troubling parallels to that dark period in economic history.

"This is the most serious crisis since 1929," Rasmus told a Community Time audience of more than 70 people in the Soda Center on Oct. 29. "There are similarities between the banking crisis of 1930 and 1931 and what we see today."

Those similarities include banks' unwillingness to make loans, even after a major infusion of capital into financial institutions as part of Congress' $700 billion Troubled Assets Relief Program (TARP). Credit markets remain frozen, providing no relief to individuals affected by the close to 20 percent drop in housing values since 2007.

"It was an erroneous assumption that banks would loan that money into the housing market," Rasmus said. "There's no guarantee that banks will loan. There's talk that they will use that money to buy other banks."

Rasmus' remarks came in advance of the publication of his book Epic Recession and the Global Financial Crisis. "Epic recession" is his term to describe conditions he says are worse than a traditional recession, but that do not (yet) constitute a depression.

"It's a hybrid state, an unstable state that must return to a traditional recession or become a bona fide global depression," he says.

Deregulation, monetary policy and increasing debt levels have all played a role in the financial mess, Rasmus said, but he sees the growth of speculative investment over the last two decades as the main culprit. Wall Street firms led the way by borrowing huge sums of money to buy assets they intend to turn around and sell in order to turn a quick profit.

"With normal investment, there's an anticipation of receiving long-term benefits," Rasmus said. "Speculative investors are looking for gains based on driving short-term prices up or down."

Much of the latest wave of speculative investment has focused on mortgage-related assets, which were gathered together and sold to investors in a process called securitization, something Rasmus criticized.

"They were going to spread the risk around - but they were causing a contagion of risk to institutions all over the world that were buying these bonds," he said.

As the turmoil continues, Rasmus predicted that the Dow will drop to 7,000 points, pension and hedge funds will experience major problems, and companies like Chrysler and Sears will lay off thousands of workers.

The housing market, where Rasmus expects a further 20 percent drop in values and 5 million additional foreclosures, remain at the heart of the crisis. He called for a freeze on foreclosures for up to one year followed by the renegotiation all mortgages made since 2002.

"If the real problem is asset-price deflation, you have to address housing foreclosures and stop more supply from coming on the market."

--John Grennan
Office of College Communications

Photo by Gorbachev Lingad ‘10