2009 March 22 Sunday
Latvia Looking At Economic Depression

In Latvia economists need to watch what they say or wind up in jail. Hey, didn't the secret police get phased out with the withdrawal of the Russian colonial power?

VENTSPILS, LATVIA - Last November, Dmitrijs Smirnovs, a young economics professor in this coastal university town, published an essay in a leading Latvian newspaper warning that the country was heading for a financial collapse to rival Iceland's.

Soon after, the secret police showed up at his home. They held Mr. Smirnovs for two days. The charge: spreading unrest and destabilizing Latvia's financial and banking system.

"I said we are bankrupt. I wrote that people should not have their money in banks, and they should not keep their money in Latvian lats," Smirnovs recalls, sitting in his cold office, the heat turned off, he says, to save money. "That was enough to have me detained. They are still investigating me."

Was Smirnovs exaggerating? No, Latvia is heading into a depression.

Latvia's economy grew at a double-digit pace for years since it joined the EU in 2004. But it fell 10.5 percent year-on-year in the last quarter of 2008. The gross domestic product is expected to decrease another 12 percent this year. Unemployment could reach 15 percent. Housing prices, once a boon, are down 25 percent, according to Global Property Guide.

Total economic contraction will exceed 20%. That's a depression, not a recession.

Harvard economist and former IMF chief economist Ken Rogoff offers some comments on just how big the economic problem has become (skip ahead to time 1:55 where his comments start).

Rogoff's comments support the views that put Smirnovs into police custody for a couple of days. Rogoff says some countries can not afford to guarantee away their bad bank debts because the debts are too large.

"In a lot of European countries the banking liabilities, what they owe, are three and five times national incomes. They can't guarantee them. So many of the policy makers are like deer caught in the headlights. They don't know what to do."

People who think Barack Obama and little Timmy Geithner know what to do should rethink their beliefs. These people are in over their heads. Their response has been too small scale in Rogoff's view. He also expects policy makers to embrace inflation as a solution.

"To fix the banking system would be a couple of trillion dollars... The trouble is if you don't put enough money, if you're not decisive enough, you've done nothing...That's what's been happening frankly. ...I personally believe we are going to end up deciding to inflate it away".

Rogoff underscores the immensity of what has happened.

"What's scary about this is that the financial system has imploded and you can't get going again without fixing it."

Rogoff faults US policy makers for their feelings of exceptionalism:

"They thought 'We're the United States, we're special, we can do this, we can borrow lots of money'." ... Its just incredible that with house prices doubling in 5 years just off the charts of things we've ever seen that you'd have the head of the Federal Reserve, the US Treasury Secretary, our leaders going and say 'this is fine, this is financial globalization, its just that we're doing a good job.' Its hard not to get angry".

Rogoff thinks it will take 4 years (the end of 2011) to get back to the level of incomes we had before this crisis started. Before then he thinks unemployment in the United States could reach 11% or even 12%. He also thinks housing could go down 2 more years till it hits bottom.

People are unprepared for deepening recession.

A MetLife study released last week found that 50% of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

Peggy Noonan says people are feeling a lot of fear.

Gun sales continue up. The FBI’s criminal background check system showed a 23% increase in February over the previous year, a 29% increase in January, a 24% increase in December and a 42% increase in November, when a record 1.5 million background checks were performed. Yes, people fear Obama will take away the guns he thinks they cling to, but a likely equal contributor to what The Wall Street Journal’s MarketWatch called a “gun-buying binge” is captured in the slogan on one firearms maker’s Web site: “Smith & Wesson stands for protection.” People are scared.

Also, people have lost faith in our leaders. No kidding.

I spoke to a Manhattan-based psychiatrist who said there is an uptick in the number of his patients reporting depression and anxiety. He believes part of the reason is that we’re in a new place, that “When people move into a new home they increasingly recognize the importance of their previous environment.” Our new home is postprosperity America; the old one was the abundance; we miss it. But he also detected a political dimension to his patients’ anguish. He felt that many see our leaders as “selfish and dishonest,” that “our institutions have been revealed as incompetent and undependable.” People feel “unled, overwhelmed,” the situation “seemingly unsalvageable.” The net result? He thinks what he is seeing, within and without his practice, is a “psychological pandemic of fear” as to the future of things—of our country, and even of mankind.

I find myself pining for life in a simpler paradise.

Share |      By Randall Parker at 2009 March 22 11:42 AM  Economics Disasters

Big Bill said at March 22, 2009 9:44 PM:

So Ken Rogof tells us that it is a disaster?

So where was he for the last 20 years?

Pimping globalism, gutting America, and giving our county to aliens (for our own good, of course).

Making a mint off his hedge funds and consulting work.

Why should we listen to him and his tribe of economists now?

He and his friends were out to make a buck off us selling us used toilet paper for our 401-K's.

Like his pal Greenspan and buddy Bernanke he was milking us for all he was worth, pimping pie-in-the-sky nostrums to Americans.

But that has all changed, of course. Now he has seen the error of his ways. Now he has seen he light. Now he is ready to lead us to a Great Tomorrow.

Sorry, Kenny. Too little, too late. Get off the stage and let an American take over. So do us a favor. "Rise up" from the filth that is America and the galus and make aliyah ... Now.

We did fine before you got here. We'll do fine after you leave.

Ned said at March 23, 2009 6:01 AM:

Rogoff makes a lot of good points - the interview is well worth listening to. However, one point that he fails to make is that he was as clueless as all the other economic big shots about the unfolding meltdown. On November 15, 2007, in an exchange with Peter Schiff, Rogoff called a recession "unlikely" and praised the regulation of US banking and finance industries. Listen to the whole thing:


no said at March 23, 2009 9:42 AM:

Just because people like Rogoff claim there was no problem doesn't mean they really believe that. Any kind of pyramid scheme which involves the people at the top making the money from the suckers at the bottom is dependant on 'confidence' of the suckers at the bottom, none of these people who sit at the top of the pyramid are going to do or say anything that might lead to a loss of confidence.

Kudzu Bob said at March 23, 2009 9:46 PM:

Oddly, I find some cause for hope in the Manhattan shrink’s claim that that more of his patients not only now suffer from depression and anxiety, but regard our leaders as selfish and dishonest. Even the privileged, self-absorbed denizens of Manhattan have begun, however dimly, to perceive that something has gone badly wrong with America. That is a necessary first step.

If pain can be said to have a purpose, it is as a means of education.

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