Alan Friedman, the chairman of FBC Media, is a veteran of the Financial Times, The Wall Street Journal, and the International Herald Tribune.

Jan 26 2010, 4:51 pm

Our Not-So-Great Recession

As the financial crisis of 2008-2009 slowly passes into history, the first round of autopsies is beginning, with congressional committees looking for culprits, and everyone from business leaders to economists to the proverbial man on the street grappling with answers as to what precisely caused the meltdown. It is now almost cliché to speak of how the so-called “Great Recession” nearly brought down the global financial system—how it was the worst crisis since the Great Depression and how the world has changed dramatically as a result.  Clichés can be compact truisms, but in this case, what’s most striking about the world isn’t how much things have changed as a result of the crisis but how little.

First of all, it’s a stretch to rank the recent meltdown in the top five worst downturns in American history. During the Great Depression, unemployment in the United States was 25%, and that was a low-ball estimate at best. Equity markets lost more than 80% of their value, and thousands of banks collapsed. When you lost your home in the 1930s, you likely became homeless, hence the sight of “Hoovervilles,” those tent cities that popped up in New York and throughout the country. Or take the 1973-1974 downturn, which was followed by years of double-digit inflation, the near bankruptcy of New York City, and a sharp rise in crime and urban decay.  The economic crises of the 19th century were worse: the Panic of 1873 led to years when as much as half the American labor force lost their jobs.

Outside the United States, the Great Recession wasn’t nearly as great. Unlike prior economic crises, when governments fell and mobs assaulted the centers of power, there has been little political upheaval and almost no violence. In fact, large swaths of the world – China most notably, but followed closely by Brazil and India – emerged with their relative position enhanced as a result of the crisis. China has $2.4 trillion in reserves and a larger share of world trade than before the crisis, and India—by virtue of having an insulated and partly closed financial system – suffered far less and has emerged much stronger. In fact, what is termed the worst crisis since the Great Depression in the United States and Europe is actually the greatest boon since decolonization for much of the rest of the world.

In that respect, the world has changed. The locus of financial and economic activity has moved away from the United States and become dispersed throughout the world. No one center has replaced the United States, and indeed, the U.S. remains pivotal, large and absolutely central to the economic vitality of the globe. But the crisis did put an exclamation point on what had been happening in the decade before, namely the emergence of multiple regions as viable and vital economic powerhouses, especially Shanghai, Beijing and Hong Kong but also Mumbai, Abu Dhabi and Dubai (even a hobbled Dubai), Rio and Sao Paulo, and even Toronto. 

The globalization of capital is a dramatic evolution in the economic system but not what most have in mind when they speak about the effects of the not-so-Great Recession. The human costs in Europe and the United States in the form of home foreclosures, double-digit unemployment and restricted access to credit are real, and for the United States at least, may last far longer than in the past. But the structural shifts in the U.S. economy weren’t caused by the crisis; they were obscured by the housing and credit bubble. The housing mania and its attendant boost to domestic manufacturing and construction briefly created an illusion in the United States that the structural changes of the 1990s would have only an upside, namely that the globalization of labor and the efficiencies in manufacturing wouldn’t lead to far less employment. The fact is that 13 million manufacturing jobs in America today produce more goods than 50 or 60 million did half a century ago, just as less than 3 million farmers today produce more food by far than 100 million did at the turn of the 20th century. Technology and globalized supply-chains have wreaked havoc on the domestic labor model in the U.S. and allowed capital to thrive while labor struggles. But that was true in 2007, and in 2000. It just took the crisis of last year to expose that reality.

Finally, as the growing populist anger at banks and Wall Street bonuses makes clear, the economic shifts of the past decade or more have allowed businesses and capital to detach from any one nation or state. That leaves governments and workers at a severe disadvantage, and far from changing that, the financial crisis only aggravated it. If anything, rather than clipping the wings of business and finance, the crisis may have liberated them further. Populism today is not likely to solve that problem, unless it becomes populism on a international scale, and with the emerging world growing wealthier, that is unlikely to happen.

The crisis did, admittedly, raise the specter of a freeze of the global financial system. With technology linking and enabling capital flows, and doing so largely  in a way that’s indifferent to national borders, there is the possibility of a meltdown happening too quickly to staunch. The world may be a more stable place in general, but the potential of financial Armageddon is there. The crisis was a reminder of the downside of an interconnected global system, and the fear that engendered explains some of the hyperbolic rhetoric.  But there is a deeper fear, and a legitimate one, harbored by many of those who will gather in Davos this week: the American century has come to an end, and with it a particular global order. For some, that is alarming; but for others, and they are far more numerous, it is a new dawn.


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Comments (4)

good article. If i recall, a few culprits in this great recession would be the banks and financial institutions that sent out free credit card solicitations and mortgage refinance solicitations weekly to nearly everyone that had a mail delivery address or PO Box. Add to that that the USA has been decreasing manufacturing in all sectors for the past 30 years and as a nation we have become an internal service provider...i.e., producing no real tangible widgets on a global scale. We knew this in the 1970´s from all the academic position papers posted in the press, but we ignored the warning. Then Japan overtook us in the 1980´s and now China in the 2010´s.
At the same time that Wall Street became even more greed driven, state and local government expanded heir services, we took in 2 million immigrants a year (which required more government but off set by increased tax revenues)...but still bureaucratic growth. And add a few costly and un-winnable wars...
Globalization has its good and bad points. We can see the bad ones, less manufacturing jobs for Americans and increased imports. We Americans caused the crisis or at least were the main contributors. Now, is anyone ready to live on less, pollute less and commute on mass transit more, pass a universal health coverage, disband our NATO membership (or at least be a minor influence) and decrease the military industrial complex war machine (I know, it does create manufacturing jobs, and we have been protesting this industry since the 1960´s). If so, we could be on a sustainable path to recovery in 30 to 50 years. But somehow, I doubt that America is ready for these socialist measures.

There is one big point that the author leaves out of his equation of the impact of the recession on the world. Even though the recession has set America back for now, by 2020, China and India will be producing a lot of global demand. Not to mention Russia, Brazil and the Middle East. Even though most people around the world cannot afford to buy American products right now, by then a mixture of rise in their wealth and the drop in exchange rates with the dollar, will give rise to a whole bunch of new consumers. Does that mean we will be producing cars to export to Asia? Probably not but it does mean that we will be able to sell them high value products that they can afford. Right now America suffers from an overly inflated currency but all this economic weakness will give rise to a more proper evaluation of the worth of American goods and services in the marketplace. Its a proper readjustment that has happened throughout history. We cannot stop it without engaging in catastrophic trade wars which usually lead to economic instability and real war. That is why the only danger to us really comes from electing populists to run the government. I would rather have a faux populist like Obama than a real populist like Palin or Brown. Populists don't have an ideology they just 'know' what the public want and they deliver it without thinking of the consequences.

First, Russia, Brazil, and the Middle East are not going anywhere. Russia is losing a 1M people a year, the country is still run by the oligarchs, albeit ones who are on friendly terms with the Kremlin, dissension leads to jail cells and more frequently than not death. What does the Middle east have besides oil? Have you evaluated the oil fields in Saudi Arabia and Kuwait? How is the Great Ghawar oil field doing; then tell me they have a robust future. How many meetings have you had in Brazil or any part of Latin America? Yeah they show up 1, 2, or more hours late. Corruption, crony-capitalism, massive poverty, death-squads that make Detroit look safe, and racial tensions. It's Louisiana on steroids. None of these countries are real contenders.

Second, since nothing has really changed, then I assume everyone feels safe! When Stiglitz, Krugman, Roubini, and every other credible economist says, with TBTF institutions and neither government or business willing to change, things are worst off than they were before the crash.

So, I'm not sure I understand this article. What is it saying? Since it really didn't cost that much to bail the banks out, if we have another couple downturns of this nature it would be okay? We don't need systematic changes, because Goldman Sachs is doing so well? Certain cities in Michigan, with 25% unemployment, should just be happy that it's not 50%?

it seems that the real unemployment in America is much higher than 10%. If one was to calculate the unemployment the same way it was done in the time of the Great Depression we would be looking at around 20%. Also, it does not take into account the amount of people who have simply given up on looking for work. Lastly the great shocker about this recession is the way the moral hazard regarding the catalysts behind the Ponzi scheme known as the American economy has been wiped out. The truck driver from Michigan earning 40K at most has saved the 50 million dollar bonus of an average Goldman-Sachs employee. America to a large extent has done the opposite of what it usually preached to the world and has become a socialist economy for the bankers which have been saved on the poor man's back while never been asked to pay anything. US policymakers should be ashamed and US taxpayers should rebel