US recession will dwarf dotcom crash

Edmund Conway
London Telegraph
Monday January 28, 2008

The recession facing the United States is of a scale that dwarfs the dotcom slump. The slowdown will cause a damaging regulation backlash as governments attempt to compensate for the financial pain facing families. Britain faces a similar plight, though it may avoid as deep a slowdown as the US.

The views of Stephen Roach, one of the world's leading economists, now heading the Asian wing of Morgan Stanley, would have seemed outrageous at last year's World Economic Forum. It is a sign of the times that they are now close to the consensus. This year's event has been dominated by discussions of the stock market slump on both sides of the Atlantic, the Federal Reserve's emergency interest rate cut and the SocGen fraud disaster.

But underlying everything has been the silent truth that the US is facing a very possible recession, and is fast having to adapt to a far less enjoyable economic climate.

"We have, as relatively sophisticated, well-developed economies, gotten hooked on credit as never before," said Roach, speaking about the UK and US. "If we had been running our economies the old-fashioned way, for example, where saving and consumption were funded by income, maybe we wouldn't be in this mess we are in now.

"Maybe the growth we have been realising has been something of an illusion predicated on levering our assets, and unfortunately we didn't fully understand the risks we were taking on. The US may be in recession right now. The UK is not?. The US has more vulnerablility to a post-bubble shake-out today than it did seven years ago, and [more] than in the UK."

The reason this crunch will be so much worse, he said, is that the chunk of the economy which is shuddering to a halt - homebuilding and housing dependent consumption - is six times bigger than the spending on IT, which triggered the last one.

"The magnitude dwarfs anything we saw seven years ago."

The endgame, he said, is an "average recession" meaning just over a year's worth of economic shrinking - three times the depth of the recession seven years ago.

Full article here.