Second recession could be more painful than the first

The Great Recession of 2007 that rocked the entire globe might have compelled many jobless to take up the drastic step of committing suicide. But, the recent warnings by the economists claim that if the economy falls back into recession now, exorcising of its demons could be a lot more painful than the last time.“It would be disastrous if we entered into a recession at this stage, given that we haven’t yet made up for the last recession,” said Conrad DeQuadros, senior economist at RDQ Economics.

In a quick response, US president Barack Obama said that the country’s “urgent mission” now was to expand the economy and create jobs. US Treasury Secretary Timothy F. Geithner said in an interview on CNBC on Sunday, Aug 7 that the United States had “a lot of work to do” because of its “long-term and unsustainable fiscal position". In fact, the policy makers used most of the economic tools at their disposal to combat the last recession, and have few options available.

During the last recession, the employers had shed all the extra work shifts and weak or extraneous employees that they could. As shown by unusually strong productivity gains, companies are now squeezing as much work as they can from their newly “lean and mean” work forces. Should a recession return, it is not clear how many additional workers' businesses could lay off and still manage to function. With fewer jobs and fewer hours logged, there is less income for households to spend, creating a huge obstacle for a consumer-driven economy.

“There are only so many times the Fed can pull this same rabbit out of its hat,” said Torsten Slok, the chief international economist at Deutsche Bank. “There is no approachable precedent, at least in the postwar era, for what happens when an economy with 9 percent unemployment falls back into recession,” said Nigel Gault, chief United States economist at IHS Global Insight. “The one precedent you might consider is 1937, when there was also a premature withdrawal of fiscal stimulus, and the economy fell into another recession more painful than the first.”

“In the financial crisis, when markets were freezing up, the first response was, ‘I’ve got to get some cash,’ ” said Neal Soss, the chief economist at Credit Suisse. “The fastest way to get cash is to not have a weekly payroll, so that’s why we saw such big layoffs.”