David Rosenberg: This is the Great Depression II

David Rosenberg has been one of the voices of reason warning of excesses during the recent boom and predicting the unraveling to which we are now witness.  I have quoted him liberally here.  There is a very good piece on Rosenberg in the Canada’s National Post (Rosenberg is a Canadian) from Dec 30th.  Below is a snippet form that article.

Enjoy.

David Rosenberg drew on inspiration from market-rules theorist Robert Farrell and asset-bubble historian Charles Kindleberger to predict the economy’s demise this year.

Rosenberg, the chief North American economist at Merrill Lynch & Co. in New York, by January had already called the recession that this month was officially declared to have started in December 2007. He also said the Federal Reserve would lower its main interest rate to 1% by year-end, one-third of the median estimate of economists surveyed by Bloomberg News; by October, policy makers brought the rate to that level.

Rosenberg, 48, refused to trust his computer models, sensing that the end of the credit and housing-market booms would cause a deeper rout than most analysts thought. Now, he predicts the carnage will cause a 2.5% contraction in gross domestic product in 2009, and sees historians calling the current era “GDII,” a reference to the Great Depression.

“We came off a prolonged period of prosperity that was fueled by excessive leverage and an asset bubble of historical proportions,” Rosenberg said in an interview. “Either you believed that this was sustainable or you didn’t. I came to the conclusion that this was going to end very badly.”

Please read the rest of this article at the link below. It has some good commentary on Robert Farrell, the now deceased Charles Kindleberger, and Jeremy Grantham.

I should note that Rosenberg works at Merrill Lynch, and works in a brilliant  research team that includes Kathleen Bostjancic and Richard Bernstein who have been equally cautious about the economy and the markets over this business cycle.  Why weren’t the Merrill bosses like Stan O’Neal listening to their advice?  Similar questions should be asked about Jim O’Neill at Goldman or Stephen Roach at Morgan Stanley.  The chief economists at these firms were very cautious while their firms were risking everything.

I wonder if Rosenberg and his group are staying on at Bank of America now that the Merrill take over is complete.

Source
How David Rosenberg foresaw the crash – National Post

8 Comments
  1. Frank Thoughts says

    Canada is packed full of computer modelling fairies: this guy must be an exception for actually having a brain independent of the boring, conformist trash that signify finance and academia in Canada. Canadians have actually be claiming this whole mess would pass them by. They are now in for a big shock.

    1. Edward Harrison says

      The Canadians have thought they were immune despite house price collapses in Alberta. Early in 2008, even there, there was an unjustified sense of de-coupling from the U.S. Obviously, people choose to believe what is convenient. At this juncture, one must ask how severe the downturn in Canada will be given the intertwining with the moribund U.S. economy. I think it will be fairly severe, but hopefully not as bad as in the U.S. Let's wait and see, because much of it has to do with how many writedowns we see at banks and whether this impairs capital as it already has at companies like Manulife. Oh and the computer modeling fairies seem to be everywhere. Witness this post from Naked Capitalism:

      https://www.nakedcapitalism.com/2009/01/new-york-t

  2. Wag the Dog says

    >> Why weren’t the Merrill bosses like Stan O’Neal listening to their advice?

    Probably because for every one Rosenberg at Merrill, there were four perma-bulls justifying why risks were low, why we were in a new paradigm, and why the systemic collapse scenario was overblown. (This ratio seems to have been common on media outlets such as CNBC.) O'Neal may have then picked the middle ground — If one guy insists that 2+2=4, and four people are yelling 2+2=8, wouldn't one be tempted to think 2+2 is closer to 7 rather than 5?

    There may also be the tendency to decide between conflicting advice using regret minimisation rather than avoidance of the worse case scenario, especially when loss avoidance and steep discounting of future events come into play. In the management's eyes, the immediate and certain loss in profit due to prematurely selling out one's positions in a rising market, is much more regretful than a probable collapse of the business at some unknown point in the future. (A Dan Gilbert video https://www.ted.com/index.php/talks/dan_gilbert_re…has been doing the rounds last month that delves into various biases in decision making.)

    Then there's the social aspect: If Merrill Lynch fails, it won't be alone since many other investment banks were following the same risk taking policies. Misery loves company, and bizarrely helps to significantly discount catastrophic failures.

    Of course, the decisions look disastrous in hindsight now that no one is writing up lengthy articles on how all the perma-bulls got it right and the bears are not being dragged in front of Congress to admit they found flaws in their ideology. Is this what the Americans call Monday morning quarterbacking?

    1. Edward Harrison says

      I would submit that the answer is even simpler: Stan O'Neil was not incented to listen to his economists. His incentives were to take risks, so he ignored them as did everyone else with those same risk-seeking incentives.

  3. Dr. Raju M. Mathew says

    STRATEGIES FOR SURVIVAL AND GROWTH IN THE AGE OF
    THE GREAT DEPRESSION II
    DR. RAJU M. MATHEW
    Al Ain University of Science & Technology,
    Abu Dhabi, UAE

    This is the Great Depression II
    The present crisis that we are now facing can rightly be called as the Great Depression II of 2009 and it is several times severe than the Great Depression I of 1929. It is not mere a financial melting down; not mere a credit crisis; nor even a recession that disappears within two years. The dimensions and intensities of the Great Depression II are quite different from the early one. Who had brought out the present crisis and where had gone all the money or credits that were available before four or months, are the two questions that the general public is asking.
    Who has brought it?
    Almost all banks had been lending five to ten times more than what they had, by diluting the principle of 80/20 in the age of electronic cash and e-banking or e-commerce, that ultimately resulted in the credit crisis and crushing of the stock markets. Further, the heavy expenditure on armaments incurred by almost all nations and terrorist organizations had aggravated the crisis. By siphoning off billions from the accounts of the big corporations and also individuals, especially the elderly, the terrorist organizations made money for their operations. Governments borrowed heavily for defense expenditures. Unfair business practices and high level frauds had made every thing very complex.
    The Basic Reason
    After high and fast growth and booms now it is the turn of gloom, recession and depression. There is a limit for speed and growth. Development based on aggressive marketing, consumerism and globalization, ignoring the vast majority, cannot go on very long. Recessions and depressions are self correcting mechanism for the maladies of a society that strives for unlimited growth at a high speed. No human being or economy can run fast for very long. Information Technology and the Modern Management Techniques do not have any answer for the present crisis. These are the basic lessons that the Great Depression II teaches us.
    After a period of fast life, everybody has to go back to slow life. In the fast life, nobody has any time even to dream, imagine, think and learn. Knowledge and scholarship are pushed back for data and information; learning is reduced into an exercise for scoring of higher grades or marks; reading is neglected for the sake of scanning and extracting from the internet. Critical thinking and creative ideas or works are denigrated; superfluous analysis and mimicries are dominated in the place of sound theories and strategies. Men of ideas, scholarship, theories and strategies and multi-disciplinary backgrounds could alone solve the present crisis.
    In the fast life, even young men and women could not find time for romance and love making other than fast sex, that too without the botheration of child birth. The greatest causality is the family life, the cordial relationships between wife and husband and between parents and children. Even in religion, faith in God and love of human beings are pushed back by the harsh and rigorous practices and rigid interpretations, without any element of mercy and forgiveness.
    The Missing Link
    The value and importance of rural life, especially agriculture are withered away for the over projection of the glory of urban life and the service sector. But cities could not survive without farming and rural sector. Urban sector is depending too much on the rural sector rather than the villages relaying on cities, because most of the villages could be easily made self sufficient with regard to the basic necessities of life. Service sector of an economy could not flourish when its agricultural or industrial sectors are weak.
    How long it will be?
    The Great Depression II, now in its first phase, would continue for a minimum period of five years, sometimes ten years, in a more rigorous way. It brings about a crisis of faith in technology, money power, managerial talents and the entire banking and insurance sector, besides the money and stock and share markets and the credit system The highly acclaimed economic and business wisdoms and formulas are crushed and shattered. A sense of helplessness and even meaninglessness are to dominate in the thinking and behavior of the common people. Everybody, including the top billionaires and technocrats and the most trusted business houses, has become vulnerable. A good many of them, especially the youth, are in the verge of a suicide or mental brake down.
    We have to accept that the age of consumerism and the dominance of the service sector over the agriculture and industrial sectors are over. The age of supermarkets and malls besides the over-salaried CEOs and their big bonus are over. So also is the case with cities over the villages. The inter-sector imbalances with regard to growth and wage or salary structures and the striking disparities with regard to the standard of living of the people of the various sectors are the basic reason for the present global crisis. The growth of defense industries is possible only jeopardizing all the other industries and sectors.
    The only agency to deal with The Great Depression II with long term strategies and policies is the Governments that must be strong and duly functioning. No single country or government could tackle it; instead, global efforts and strategies are required. The UN must be made strong enough to act globally for dealing with the Great Depression II, chalking out the area of international cooperation. It must act on a war footing; other wise, over 80 per cent of the jobs would be wiped out; and billions would die out of hunger, epidemics and civil wars.
    Ineffectiveness of the Keynesian Strategies
    The Great Depression II could not be dealt with a set of conventional monetary and fiscal policies as have been prescribed by the Keynesians or the Post-Keynesians that have reached the saturation level. There is a limit for technology and management techniques, including marketing in this regard. Now what are required are a massive behavioral change and a new way of life, freeing from consumerism and fast life style on the part of the society as a whole. Greater cooperation and mutual support between nations, even at global level, are the only means for survival and growth. All nations must cut their defense expenditure to the extent of seventy or eighty per cent and a joint global strategy against terrorism must be launched as no nation can be made free from it.
    Time for Re-creation
    This Great Depression II brings life slow. It is the time for learning and acquiring knowledge, creative works and above all reinventing the basic human, family and religious values coupled with humanism, spirituality and cooperation. It is the time for baby booms. It is the time for the re-birth of rural and farming sector. People find new meaning in agriculture and country life. Now, it is unproductive to make heavy investments in cities and high technologies and the service sector. Religions have to play a very important positive role in these regards, even by developing mutual respect and cooperation rather than revelry and aggressive fundamentalism.
    Counter Strategies
    The best strategy to deal with The Great Depression II is to invest heavily on the rural and farming sector and develop their infrastructures along with making heavy investment in education, especially basic science and engineering, social sciences and humanities. Learning must be encouraged by developing libraries and encouraging the overall reading habits of the people. Cost effective Open Learning– Open Schools and Open Universities or Virtual Universities, even in Science and Technology must be set up or developed to make education reach in the hands of millions.
    These strategies are equally applicable to both the East and West, developing and developed nations, including GCC countries. Nobody, including the American President, Barrack Obama, has a magic stick to deal with The Great Depression II, other than following the above noted long term strategies and policies. It is high time to realize that no affluent nation can survive by keeping a large number of nations or people poor and depressed and selling arms and defense equipments and following consumerism. It is high time to realize that terrorism and religious fundamentalism add miseries and sufferings of the humanity and bring hell on earth.
    From Dooms to Booms
    When implementing the above policies and strategies, people will come out with innovative ideas, plans and strategies and to apply them in agriculture, industry and the service sector within three years. All these will push up economic activities, including global trade and business. International cooperation between developed and developing or underdeveloped societies and nations would emerge so as to ensure a minimum development and standard of living for all. The people will dictate their terms of peace and co-existence over the Governments and the Terrorist Organizations, including aggressive and fundamentalist religions.

    About the Author

    Dr. Raju M. Mathew is a strategist and theoretician with strong background in Economics, Cybernetics, Education and Information Science & Technology with long years of experience in teaching and research, including directing a major research project and supervising ten doctoral works. With the publication of his book, ‘Library Resource Allocation’ from England in 1981 he has been recognized as a theoretician and strategic thinker, that made the Netherlands based FID to nominate him as one among the International Committee on Research on Theoretical Basis of Information Science in 1983. He formulated two basic theories of knowledge consumption and knowledge production that got published jointly by the FID and the USSR Academy of Sciences in 1985 in their work, ‘Theoretical Problems of Informatics’.. Now they are known in his name and become the field for doctoral research.

    In 2005, Prof. Mathew proposed Knowmatics and Knowledge Technology in the place of Computer Science and Information Technology for processing and handling knowledge and also set the International Forum for Knowmatics & Knowledge Technology (IFKT); http://www.ifkt.net. Dr. Mathew on 25th Oct. 2008 in his letter addressed to The National, forecasted the fall of oil price to the extent of $ 40 per barrel within a period of two months when the price was $78. In his web site: http://www.mathewrm.com , in Sept 2000, when IT was in boom, he successfully predicted the Great Crisis of IT within a period of five months and in April 2001, his was the only site on IT crisis. Dr. Raju M. Mathew can be contacted by mobile: 0097155-7423450 and e-mail: rajoocyber@yahoo.com.

  4. Dr. Raju M. Mathew says

    OPEC TOO MUST BEAR THE PAIN
    OF THE GREAT DEPRESSION II

    Dr. Raju M. Mathew*

    Age of Booms

    OPEC had enjoyed all the pleasures of the boom for a very long time and that made them to become the richest bloc of the world as oil price jumped to more than $100 and to some extent to $ 147 from a reasonable price of $ 40 per barrel. As a result, their unspent oil reserve funds exceeded in terms of several trillions, far ahead of the entire wealth of over 70% of the developing countries of the world.

    Consumerism

    OPEC have become super-rich with their over priced oil supplied to not only the industrialized countries but also the less developed countries of the world. OPEC has emerged as the biggest monopoly so as to dictate the price of oil as long as demand was there. OPEC have become very effective to protect the interest of its members, even challenging the very existence of the oil importing countries and thereby the global economy. OPEC have played a strategic and hidden role in bring the present global crisis, the Great Depression II by squeezing wealth of several nations and making them poor for the sake of their greed, affluence and promiscuous consumption. As a result, a large number of the OPEC citizens have been reduced into mere slaves of consumerism. Some of the members of OPEC have turned corrupt and inefficient and prodigal too.

    Goose that Lays Golden Eggs

    To OPEC, all oil importers and consumers are mere goose laying golden eggs. They are too wise enough to kill the goose, the oil importing countries by cutting oil production and creating an artificial price increase. They know that no nation can afford to buy oil for more than $ 40 when the entire world is in the grip of the Great Depression II. The world has more cars than what it needs. Without burning so much oil and making so much travel and even paying one third of the salary for the CEOs, the world economy can function more efficiently than ever. For the very survival of the humanity, we have to reduce our oil consumption and reduce the cost of production and cost of living to the extent of 40 to 60 per cent.

    OPEC recently fixed the fair price of oil as $78, for they want to make fresh investment. That means, for a very long time, they plundered the world community by charging a very high price over the fair price. Further, they have been trying to convince the world that the present crisis is only a short term one and for the sake of future oil supply, the minimum price must be fixed at $ 78. That means, they want to continue their old life style and are not prepared to share the burden of the present crisis but to transfer it on others.

    The Great Depression II

    But the world is under the spell of the Great Depression II, more sever than the previous Great Depression of 1939. The present crisis is the creation of a group of rich countries of the west, besides the OPEC for their uncontrolled greed and consumerism. Globalization and Information Technology have been designed as the tools by which the entire world has to bear the pain and sufferings of the Great Depression II. Of course, the greatest victims are the poor, especially of Asia, Africa and Latin America. However, the benefits of the earlier booms had never been reached to the poor but amassed by the rich and powerful, including OPEC.

    Collapse of the Global Economy

    The global economy is one the verge of a collapse and it cannot be saved by some stimulus packages created with very huge debt or deficit, protecting consumerism. It would aggravate the crisis within one year after some initial signs of recovery in one or two sectors. Most of the stimulus packages are designed on the assumption that the crisis will be over within one year. But, it must take at least five years for the global economy to recover from the Great Depression II because it is so weak and sick and its wounds are so deep. The global economy is totally imbalanced and disintegrated, designed to work against the poor nations. The so called rich people or nations too are getting poor because the earth does not have the adequate resources to afford their consumerism and affluence.

    OPEC Too Must Share the Burden

    It is a fact OPEC has to make fresh investment for the future supply of oil. Of course, they should have to make the investment by using their own reserve funds or the accumulated profits made by selling the over priced oil even to the developing and poor countries of the world. The fresh investment could be made without transferring the pain on the shoulders of the entire world. The member countries of OPEC must be prepared to control their extravagancies and spendthrift mentality by making themselves free from consumerism. If the world as a whole is suffering from the Great Depression II, OPEC too must be prepared to share the pain and to express their solidarity with the rest of the people. Other wise, OPEC would be treated the enemy of the rest of the world. OPEC must come out from its thick shell to save the global economy and the suffering millions with viable proposals rather than the confined to the profit motive and amassing the wealth of the world.

    * This is the fourth series of writings of on ‘The Great Depression II’ by Dr. Raju M. Mathew. His previous writing can be found if a search is made under ‘Dr. Raju M. Mathew’ or ‘Great Depression II’

    About the Author

    Dr. Raju M. Mathew is a strategist and theoretician with strong background in Economics, Cybernetics, Education and Information Science & Technology with long years of experience in teaching and research, including directing a major research project and supervising ten doctoral works. The Netherlands based FID nominated him as one of the twelve international members for its Committee on Research on Theoretical Basis of Information Science in 1983.
    Dr. Mathew formulated two basic theories of knowledge consumption and knowledge production that got published jointly by the FID and the USSR Academy of Sciences in 1985 in the work, ‘Theoretical Problems of Informatics’. Now these theories are known in his name and have become the field for doctoral research.
    In 2005, Prof. Mathew proposed Knowmatics and Knowledge Technology as the two Post-Information Technology disciplines for processing and handling knowledge so as to develop knowledge industries. He is the Founder President of the International Forum for Knowmatics & Knowledge Technology (IFKT). Some of his works are available in the site: http://www.ifkt.net
    Dr. Mathew is on a mission of making the world aware of the impacts and intensities of the present crisis, the Great Depression II of 2009 and persuading the governments and international agencies to formulate correct strategies and policies and implement them urgently to deal with it and make an early recovery from it, so as to save the lives of millions, especially the young. Dr. Raju M. Mathew can be contacted by e-mail: rajoocyber@yahoo.com.

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