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Is This the Worst Ever Yet?

Working paper #660
Peter Linneman

In this publication’s last issue, John Williams and the author determined that the 2008 recession was the “least worst” of the recessions of the past forty years. Now, the author says, we are in the second-worst recessionary period of the last forty years, and it is worsening fast. But do not bet against the U.S. economy, he cautions. Entrepreneurs are still out there, and with a modicum of political leadership and stable economic policy, we will get through this stronger than ever. Realistically, we cannot save everyone, but in the Chapter 11 limbo, companies can try to reconstitute themselves; “special” bailouts do nothing but redistribute income according to political clout. Losers must lose if winners are to prosper. If one or more of the “Hopeless Three” (U.S. auto manufacturers) goes bankrupt, their competitors’ sales will rise; their operating margins will improve, allowing them to avoid financial distress and expand output and employment domestically. As with wildebeest in the Masai Mara, death is essential to life. People knew that leverage could be risky. Debt is wonderful on the upside, but remorseless on the downside. This lesson will hopefully be remembered for a new generation.

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