Why the Great Recession Isn't the Great Depression.
Bob Bruner is the eighth dean of the Darden Graduate School of Business Administration at the University of Virginia. He teaches and conducts research in finance and management. Before his appointment as dean in August 2005, Bruner served as the founding executive director of Darden's Batten Institute, which focuses on entrepreneurship and innovation. There, he expanded Darden's Business Incubator.
As a financial economist, Bruner is best known for his research on mergers and acquisitions, corporate finance and financial panics. His books include "Deals from Hell," "Applied Mergers and Acquisitions" and "The Panic of 1907: Lessons Learned from the Market's Perfect Storm," with Sean D. Carr, which attracted wide attention for its discussion of the underpinnings of financial crises.
Question: Is the economy resetting or recovering?
Bob Bruner: Much has been made about the reset environment in which we now exist. In the dark days of September, 2008, Francoise Sarkozy said, “This is the death of Laisser-faire.” Other said it was the end of capitalism. Shortly after Obama’s election, Jeffery Immelt, CEO of General Electric said, “This is an emotional social and economic reset.” Steven Ballmer, the CEO of Microsoft, said much the same. Mohammad Al-Arian the co-CEO of the largest, one of the largest investment management companies calls it “the new normal”—as if to suggest a step function change downward in our outlook and expectations. This is a very serious meme, I would call it. It’s an idea that has spread widely through blogs and social media, certainly through the mainstream media. And I think it’s worth scrutinizing very carefully.
Quite often, these pundits will point to historical antecedents such as The Great Depression, they’ll say, "given our rates of unemployment, this is not unlike The Great Depression" or the depression of 1893 to 1897, or 1873 to 1875, and so on. And yet when you examine the antecedents you see that indeed they are much more severe than what we are living through right now. And if you look at the economics today you see some sharp asymmetries.
So we know that Detroit is in very dire shape. We know that California is struggling. Some states, some cities. Harrisburg, Pennsylvania is on the verge of bankruptcy. But other cities... Washington D.C. is actually thriving; New York City is coming back nicely. North Dakota, of all places, is actually growing. Internationally, we have states, countries such as Greece, Portugal, Spain, Ireland, in very tough shape. The United States is growing and has been growing since June, 2009, albeit at a slower rate than we would like; a slower rate than is necessary to create new jobs. And yet you have India and China that were almost unfazed by the crisis.
Germany is rebounding very nicely. So you see these asymmetries around the world and these are not the conditions of the Great Depression. Yes, we are seeing some "beggar thy neighbor" behavior on the part of other countries; yes, we’re seeing marches and rallies in Washington such as we’ve heard about in previous depressions, though the unemployment rates aren’t as bad, the growth has continued, it’s resumed earlier than the resetters might suggest. Net-net, I view the reset concept with skepticism. But I hasten to add that no one who pays attention to the facts today can deny that a lot of people are in pain, that there are grave struggles within companies and municipalities and states, and that the deep problems the United States faces are going to take years to work out. But this ain’t the Great Depression.
Question: Which industries will lead the turnaround?
Bob Bruner: We’ve seen buoyant turnarounds in healthcare, energy, event the public sector. The public sector has been hiring throughout this stretch. The defense industries, obviously with two wars on, and the subsidiary industries that feed all of the industries that I just mentioned. Technology has remained reasonably robust through this episode. Obviously, the technology that serves consumers and businesses experienced a decline, but it looks like they are on the rebound. Much depends in all of these cases on the rate of consumer and business spending and when that will reopen in serious ways.
We should remain very concerned about housing, that’s likely to be in a slump for years to come. There’s a large overhang of excess capacity, both in homes and commercial real estate. Financial services is another exclamation point, a point of concern for us, because it’s not clear how the financial regulations passed a few months ago will be actually implemented. The rules are being written right now. Certainly the rules will transform that industry in serious ways and until that uncertainty is resolved, I don’t think we’ll see the large banks and other financial institutions expanding in obvious ways. I’d say those are some of the examples of industries. It’s hard to know where else the symmetries will spread.
Reports of the American demise have been greatly exaggerated; buoyant turnarounds are happening in health care, energy and the public sector. Unfortunately, though, housing will remain in a slump for years to come.
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