Expectations for a Long Recession
By: Dr. Charles Lieberman
Date: 11/11/2008
Some forecasters now expect a long recession, not just a deep one. Such views are based on the belief housing will remain in a protracted decline, credit markets will remain in turmoil, and it will take quite a while before confidence is restored enough for consumers to resume spending. This unduly pessimistic forecast also implicitly assumes that policymakers will make many more mistakes that prevent the economy from improving. While we have no great confidence that the government will make all the right decisions to turn the economy around, it seems even more foolish to assume the government will make such poor policy decisions that it will keep the economy mired in recession. Rather, the government finally seems to have grasped the gravity of the credit market turmoil and it is aggressively taking actions to improve the situation. In time, they will achieve success.
Readers know we believe that the Treasury inflicted as much harm as good in its handling of the Bear Stearns, Lehman, AIG, and especially, the Fannie Mae and Freddie Mac situations. By punishing shareholders in the name of moral hazard, Treasury discouraged investors from putting any more capital into financial institutions, so they would not be hurt by any future efforts of the Treasury to "help" banks in need of assistance. That policy has since been abandoned and Treasury is now providing assistance on reasonable terms and even revised the terms of older arrangements, reducing the rates charged on its loans to AIG.
Most importantly, progress is being made in improving credit availability. Mortgage rates have declined to 6.03%, Libor spreads have fallen daily for more than a few weeks and are within 100 basis points of normal, and commercial paper issuance has improved. Fiscal stimulus is coming, some very soon and some with entry of the new Obama Administration. The equivalent of a major fiscal stimulus package has already occurred from the decline in crude oil prices from $145 to less than $65. Moreover, this stimulus is global in nature, benefiting consumers everywhere. Policy makers are also reducing interest rates most everywhere. Thus, major policy initiatives are being undertaken that should improve the economic growth outlook. And when policymakers see they have erred, they change the policy to render it more effective. Forecasting recession through 2010 requires that we anticipate policy mistakes in 2009 on decisions that haven't even been made, yet. That's unduly pessimistic. It is more likely that recent initiatives will restore growth in 2009. Download this article in PDF Format
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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