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You say recession, I say depression -

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You say recession, I say depression

The World Today - Wednesday, 11 March , 2009 12:14:00

Reporter: Stephen Long

ELEANOR HALL: Throughout the global economic crisis the International Monetary Fund had maintained
that the world economy would continue to grow, but no longer.

Today the IMF's managing director, Dominique Strauss-Kahn, declared that the world is in the grip
of the 'great recession' and he warned that this downturn will push millions of people into poverty
and will cause civil unrest.

Economics correspondent Stephen Long joins me to analyse this grim forecast.

So, Stephen, what do you make of this revised outlook from the IMF?

STEPHEN LONG: Eleanor, I'm tempted to say facetiously, "man the soup kitchens and build the temp
cities" - because if the IMF says we're headed to the great recession, it must be really, really

Recall that as recently as July last year; the IMF was still predicting world growth would at the
moment be at stellar pace of 4.3 per cent a year. Since then there have been a series of downward
revisions and now they are acknowledging, as is the World Bank, that the global economy is going to
shrink for the first time since World War Two.

So if the IMF is saying that we're in for a really, really bad situation. On the other hand, I
suppose, it's possible that if the IMF has realised things are that bad, the recovery may be just
around the corner. But I think that that's unlikely.

ELEANOR HALL: So, now what are the dimensions of this great recession, to use the IMF's phrase?

STEPHEN LONG: The real worry is that the great recession, as the IMF puts it, is looking a lot like
the Great Depression. The parallels are ominous, eerie and undeniable. Both began with a massive
credit bubble and asset price bubble; and the bursting into that.

This time around, though, the credit bubble and the asset price bubble was bigger. If you look at
what's happened with the housing market, the world's leading authority, Professor Robert Schiller
of Yale, says that on a global scale, we have never seen such a big housing collapse, the biggest
in history. So that's worst than the Great Depression.

If you look at the stock market, we didn't experience the huge one-off collapse that we saw in
October 1929 on Wall Street, but in aggregate on key indices, the falls in stock markets are now as
bad as or worse than they were during the Great Depression.

Look at world trade. World trade has now collapsed, suffering the biggest fall in 80 years since
the Great Depression, but the collapse this time around has come much more quickly. Then look at
the flow of investment and finance around the world: it's dried up. So to emerging markets you had
a situation where two years ago there was a trillion dollars in net capital flows to emerging

Now that's going to be down this year, forecast to be down 82 per cent, which basically means that
the emerging market economies can't finance their foreign debt, their current account and
government spending. You're looking at a really, really appalling situation. It looks really bad
and the comparisons with the Great Depression are really undeniable now.

ELEANOR HALL: But don't many economists point out key difference with the Great Depression,
particularly with the fact that governments have actually reacted, bailed out the banks; stimulated
the economies, unlike the situation in the 1930s?

STEPHEN LONG: It is certainly true that governments this time around have moved far more rapidly
with coordinated action and drawn lessons from the Great Depression and lessons from John Maynard
Keynes - the idea that government has to step in and fill the breach if the private sector is just

And also, unemployment rates at this stage are significantly lower; the US unemployment rate is
only about a third of what it was during the peak of the Great Depression. But those unemployment
rates are set to rise and if you add in underemployment, discourage job seekers and people who are
working part-time but want more hours, the unemployment rate is effectively 16 per cent in the US,
still very, very high.

The trouble I see, though, Eleanor, is whilst the initiatives of the world's government are welcome
- the massive fiscal stimulus, the banking bail-outs, A- they're yet to make a huge amount of
difference; and B- in some senses they engender the seeds of further problems.

For example, we have a situation now where governments are going to be looking to raise an
unprecedented level of debt. About $4 trillion by the advanced nations alone, and it's being
acknowledged by the World Bank and the IMF that that will essentially crowd out finance to the
developing world and the emerging markets. Which means mass hunger and poverty, because they
basically won't be able to get any money.

And then there's serious questions being raised about whether even advanced Western nations will be
able to raise all the money they want to. You've had two bond issuances by Germany, the most
healthy economy in Europe, that haven't been fully subscribed. We are probably heading for a
government debt crisis and a national debt crisis on a global scale.

ELEANOR HALL: But there is some good news today for Australia, with the latest consumer sentiment
and housing figures, isn't there?

STEPHEN LONG: There is. In the context of what's happening, the consumer sentiment figures were
reasonably good. They were down 0.2 per cent, but that wasn't nearly as much as most economists
thought they would be, given the events of recent times. Housing finance in January also improved;
seasonally adjusted 0.7 per cent.

What we're seeing here, though, is essentially the First Home Buyers Grant pushing up first home
buyers into the market and investor finance collapsing. So you're still seeing investor-dwelling
commitments going backwards.

And that's bad news for builders, because they're trying to get up new building projects and if the
investors aren't there, then the finance isn't there. So it's good, but not as good as one might

ELEANOR HALL: Stephen Long, our economics correspondent, thank you.