As policymakers struggle in their attempt at restoring market confidence, the probability that we may be facing a protracted recession becomes more likely. A casual observation of the various interventions that have occurred to date suggest that the various institutions are near clueless as to the most effective approach in tackling the crisis. This should come as no surprise considering that the distinguishing characteristic of the current downturn, differentiating it from previous ones has to do with its multilayered nature. The first wave began with the collapse of the housing bubble, followed rapidly with a second wave in the form of a ravaging credit crunch. This in turn triggered a significant contraction in consumer spending as household wealth began to shrink (negative equity, stock market corrections, tighter lending standards). Business contraction seem to be the next wave in line as firms begin to cut production and curb capital expenditures in light of weaker demand and diminished access to credit.
What all this basically means is that to tackle this particular crisis will require a multipronged approach given that there is more than just one malaise that needs fixing. It also means that the duration of the recession is likely to lengthen considering that the various layers are unlikely to be fully resolved at the same time.
