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March Will Be Recession’s Tipping Point

Posted: 24 Feb 2009 07:07 AM PST


In March, a number of actions will occur that will be critical to demonstrating whether the economic disaster will get much worse.

The first is that the issue of the nationalization of the banks may well be resolved. The debate about the issue has already hit a fevered pitch and if the first quarter is going to bring another series of multi-billion losses, institutions including Citigroup and Bank of America (BAC) may simply not have the balance sheet strength to remain independent.

While having the government seize one or two major banks may ultimately be the key to their survival, the public may instantly suffer a huge loss in its confidence in the rest of the independent banks, brokers, and money managers in the country.

There has not been a collapse in confidence in banks since the Depression. While there may not be a great deal of logic to heightened fear about the future of banks if the government ends up owning a few of them, the psychological effects on consumers could be devastating.

Taxpayers will also be looking forward to benefits from the drop in the taxes that they pay to the government. One of two things will happen. Most of the money will go to savings and paying debts or it will work its way back into the economy in the form of consumer spending.

A lot of data about car sales, unemployment, exports, capital goods, retail spending, and consumer confidence will come out next month. None of it will say much about the future. It will really only reflect what has happened in the economy since the beginning of the year.

But, March is the month when the cement will be poured for much of the balance of the year. If most of the negative trends which have already wrecked the economy continue to accrue, the recession will get much worse and push well into 2010.

Photo by km6xo.