The people at The Wall Street Journal have been working overtime to depress their readers. In the latest Wall Street Journal forecasting survey, "On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009."
"It would mark the first time U.S. GDP—the total value of goods and services produced—has contracted for three consecutive quarters in more than a half century."
If the prediction is indeed true, the damage to jobs and a number of sectors of the economy would be disastrous. The unemployment rates in the 1973-1974 recession and the one in 1982 hit about 10%. If the upcoming period is worse, it is easy to imagine that the unemployment rate could hit 12% or 13%.
Driven by joblessness and disappearing credit, the housing market would certainly continue to fall and foreclosures would increase sharply. The housing troubles would cascade into the banking system and failure rates there could reach levels similar to those during the savings and loan crisis which lead to the creation of the Resolution Trust Corporation in 1989. In other words, several hundreds banks could fail and the current balance in FDIC accounts would be wiped out.
A number of industries would face insolvency, probably lead by automotive and airlines.
To pull out of such a deep trough, the federal government would have to increase its rescue packages from the $700 billion level to several time that. The IMF has said the costs to banks from the mortgage disaster will be well over $1 billion.
That would only be the beginning. An economic stimulus package to take the country out of a three consecutive quarter recession will go into the trillions of dollars.
Douglas A. McIntyre
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