No one knows what a Great Depression would look like in 2009. It would not necessarily have to match the 25% or so unemployment rate which was the high-water mark of joblessness in the 1930s. The stock markets might not have to correct 90% from their peaks as they did in the 30s.
There are some plausible predictions of how GDP could contract at 5% and perhaps more for several quarters starting now and how unemployment could go well above 10%. The stock prices of Citigroup (C) and GM (GM) and their tremendous sell-offs say a great deal about the market’s greatest concerns.
GM broke below $2 today and actually sold down to $1.70. That puts the stock at a 70-year low and the shares have dropped 30% today. More than one analyst has said that a bankruptcy of one or two of The Big Three could have a ripple effect that would eliminate as many as 2 million jobs. That would easily move the national unemployment rate toward 8.5%.
GM is trading at a levels that assume a Chapter 11 filing. If the government does not act this year, some of the car company’s suppliers may force the issue.
Citigroup is down below $5. It has been off as much as 20% today. Traders clearly think there is some chance that the Fed, Treasury, and FDIC will have to engineer a sale of the bank or an AIG (AIG)-style bailout. Since the current credit crisis began, it has been assumed that Citi is too big to fail, but it is not too big to part with its independence.
Even after the 50,000 layoffs that the bank has announced, if it is moved into a shot gun wedding with another big bank it would not be unimaginable that a second 50,000 jobs could be lost. The cost of the government stepping in could be at least as high as it has been with AIG–over $100 million. A Citi "failure" would also shake confidence in the banking system to its core. What that would mean to the overall economy is hard to say, but it would certainly tighten credit even more than it is tightened now.
It may only take a disaster with two companies to drive the economy from a deep recession to a very deep recession. Very few Americans have seen anything like that. They won’t know what hit them.
Douglas A. McIntyre
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