Recession Could Be Worst Since World War II

It could be real bad:

No less an authority than former Federal Reserve Chairman Alan Greenspan wrote this week that "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II.

Other noted economists are also sounding alarms. Harvard professor Martin Feldstein, the former head of the National Bureau of Economic Research, said recently he believes the country is now in a recession and it could be a severe one.

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What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion when the market closed on March 14 to being sold at the bargain-basement price of about $236 million two days later.

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The problems began last year with rising defaults on mortgages as a housing slump intensified, but they have now spread to other parts of the credit markets with institutions growing fearful about making other types of loans.

It is the ability to get credit that makes the financial system and the economy it supports function. When banks stop lending to other institutions that, like Bear Stearns, depend on credit to conduct their day-to-day operations, the results can be catastrophic.

"We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."

Whether or not the recession is as bad as anything since WWII—and we're pretty much at how bad the recession will it be, not whether we'll have one—it will almost certainly hurt the poor the hardest:

The goods and services Americans consumed in February were 4 percent more expensive than they were a year earlier. But there is a big divide in how much prices are climbing between the basic items people need to live and get to work, and those on which they can easily cut back when times are tight.

An analysis of government data by The Washington Post found that prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year, assuming it did not buy less of such items because of higher prices. For a broad range of goods on which it is easier to scrimp -- such as restaurant meals, alcoholic beverages, new cars, furniture, and clothing -- prices have risen 2.4 percent.

Wages for typical workers, meanwhile, have been rising slowly. In that same time span, average earnings for a non-managerial worker rose about 5 percent. This contradiction -- high inflation for staples, low inflation for luxuries and in wages -- helps explain why American workers felt squeezed even before the recent economic distress began.

And what happens to the financial "geniuses" who helped bring this about?

How can one feel sorry for James Cayne? The potential losses of the chairman and former chief executive of Bear Stearns must rank up there with the biggest in modern history. The value of his stake in Bear Stearns collapsed from about $1 billion a year ago to as little as $14 million at the price JPMorgan Chase offered for the teetering bank on Sunday.

Still, Mr. Cayne was paid some $40 million in cash between 2004 and 2006, the last year on record, as well as stocks and options. In the past few years, he has sold shares worth millions more. There should be financial accountability for the man who led Bear Stearns as it gorged on dubious subprime securities to boost its profits and share price, helping to set up one of the biggest financial collapses since the savings-and-loan crisis in the 1980s. Some might argue that he should have lost it all.

The NYT called the perversity of Cayne making that money while his company was ruined and it's failure throttled the nation's economy and world markets socialized compensation.  Because the federal government will probably be forced to come in and back up some of the financial institutions that are crumbling.  But why should homeowners get hosed while someone like Cayne skates away with less than he had a while back, but still with tens of millions of dollars for doing a ruinous job of leading his company?  

Franklin Roosevelt was sworn in to office on March 4th, 1933.  One of his first acts was to call for a special session of Congress on March 9th to deal with the banking crisis.  Congress convened at 1:00 PM on the 9th, and the 100 Days were kicked off at 8:36 PM that evening when Roosevelt signed in to law the Emergency Banking Act.  100 days later Roosevelt signed in to law the Glass-Steagall Act, which separated commercial and investment banking.

Let's hope the next President and Congress have that same resolve and sense of urgency.  Let's also hope that things aren't so bad that they need to act as quickly as did Roosevelt and the first New Deal Congress.