Welcome to Recession – next stop that ‘D’ place

Sep 18 2008 by Peter Jackson, The Journal

THERE now, they’ve said it, the “d” word. Yes, now they’re talking about depression, and I don’t mean the kind of depression a Lehman Brothers employee might be feeling at the moment, but depression with a capital “D”, as in Great Depression.

As I have pointed out before, an interesting feature of our difficulties over the past 12 months has been the tentative cranking up of language, with everyone in fear of talking down the economy, until it became obvious awful reality was running way ahead of parsimonious vocabulary.

For a long time people only mouthed the word recession as part of phrases such as: “We are definitely not heading for a recession.” Well, welcome to Recession folks, and next stop – that place beginning with “D”.

That great sage and former chairman of the Federal Reserve Alan Greenspan has underlined the seriousness of the situation, saying the current banking crisis is a once in a century, or half century event. What exactly does he mean by that? Does he mean that such major banking collapses are rare? In which case, thanks for the insight, Sherlock. Or does he mean that such events are unpredictable?

Well this one wasn’t. In fact it was predicted in a remarkable book I’ve referred to before: William Bonner and Addison Wiggin’s Financial Reckoning Day: surviving the soft depression of the 21st century. Published in 2003, the book argued that the credit boom of the 1990s and early years of this century was dangerous, out of control and would lead us to where we are heading now.

The authors were also in no doubt that one of the main culprits behind this credit boom was one Alan Greenspan who presided over the lax monetary policies that fed it. Greenspan has himself admitted that the housing boom was caused by interest rates being so low.

And they certainly were low. Under his stewardship, after 9/11 the Fed dropped the federal fund rate from 3.5% to 3% and, after Enron and other scandals in 2002, the Fed dropped the rate from 1.25% to 1%.

I could remind you that in February 2006 Alan Greenspan was made honorary economic adviser to one Gordon Brown.

But that would be just too depressing.