Latest Depression odds are like all statistics: of limited use
Robert Barros’ statistical odds of a minor or major depression occurring utilizes limited factors and, predictably, yields limited results. The principal thing he failed to factor in is the housing bubble collapse, as homes are the principal asset accrual method for most Americans. Retirement plans are second. And the losses sustained in home valuations not only pose a foreclosure crisis for a significant percentage but for the larger group, they provide incentive to pursue other means of savings and investment and to limit discretionary spending.
Additionally, due to the equally predictable overbuilding that occurs during housing booms, the oversupply of houses will help keep home prices down till the demand catches up to the supply. That’s why housing bubble collapses create U-shaped recessions instead of the more common fast recovery V-shaped ones. This factor, alone, increases the likelihood of a long recession. Barros suggests 2012 as a recovery period, as opposed to the rosy Bernanke prediction of a 2010 recovery.
(My own, less mathematical analysis indicates a modest market recovery in late 2010 with a faster growth period in 2011. Like most amateur predicters, I won’t detail all my rationales other than to indicate I also utilized historical events to calculate what’s likely to happen when.)
However, the worst part of Barros’ analysis occurs when he strays from his statistical model:
Given our situation, it is right that radical government policies should be considered if they promise to lower the probability and likely size of a depression. However, many governmental actions — including several pursued by Franklin Roosevelt during the Great Depression — can make things worse.
I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.
While admitting radical policy moves are ‘right’ if they can limit a depression, he adds his opinion that it’s ‘more likely’ the economy will recover by itself, without such efforts. Yet he offers no math, no rationale for holding such an opinion. Which means he’s guessing. And guessing negative.
What’s his agenda for doing that?
