Economic Hardship, Patience and Need for Effective Policies

Last Updated Monday, 06 December 2010

A) We experienced the worst stock market performance in January ever, the worst last five months ever, the worst year along 1931 and 1937 and the worst
decade (including January) in history! All asset classes (housing, stocks, bonds and even cash around the world) have suffered! We witnessed the worst

disaster in financial institutions in history.

B) In the real sector unemployment is rising in the USA at the highest post WWII level. The rest of the world experiences similar economic hardship. The real estate crisis, excessive leverage by financial institutions and serious economic policy mistakes affected the flow of credit in all sectors in all regions.

How long and how deep will the recession be?

C) Is there any hope for recovery? Time is definitely needed for the excess housing supply to be absorbed, for deleveraging to be concluded and for the
losses to be realised.

D) However the recovery will largely depend on policy making. Several issues need to be addressed. The following is an indicative, but not exhaustive list :

(i) Extensive tax cuts and efficient spending programs are needed immediately. What should their final level and appropriate combination be? What Budget
Deficit level is acceptable?

(ii) Marking securities to excessively depressed mortgage market prices creates huge capital losses and a multifold contraction of credit. Should a more
realistic alternative accounting system be implemented ?

(iii) Should a ‘Bad Bank’ be created to absorb toxic assets or should these assets be insured by the government?

(iv) To what extend should authorities intervene in credit markets and which securities should they purchase?

(v) Should more emphasis be given in capitalizing banks with public money or in tackling the assets (housing, bad loans) that created the problem?

(vi) How successful will international coordination be in this global environment? How will the cost be shared between governments (taxpayers), creditors and shareholders?

(vii) Will economic nationalism be averted?

E) Despite this environment, some technical aspects are improving : the resilience of the market to bad news in the first week of February, the better
performance of technology stocks (they early cyclical) and the rebound in shipping and house builders create hope that the low has been reached. But hope is not always associated to reality.

N. Ritsonis February 7, 2009