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The Case for a V-Shaped Recovery

Posted by: Michael Mandel on February 11

On Monday Justin Lahart wrote a nicely balanced piece in the WSJ on the possibility of a strong recovery. He wrote:

But just as economists were caught flat-footed by the sharpness of the downturn, history says they could be surprised by the speed and strength of the recovery — once the economy shows signs of turning around.

And he goes on to add

if the government’s coming stimulus package and bank plan are able to restore a modicum of confidence in the economy, recovery could come surprisingly quickly.

Of course, Lahart also lays out the reasons why a strong recovery might not happen anytime soon.

I’m on the fence about this one. On the one hand, this crisis feels to me like a structural downshift in consumer spending which is traumatizing the tangible sector of the economy.

On the other hand, it’s also true that the well of bad debt is limited. It’s worth noting that today’s Washington Post calculates that the federal government has “committed at least $7.8 trillion in loans, investments, and guarantees since the beginning of 2008.” That $7.8 trillion exceeds even the most depressed view of the debt losses in the economy. So it may be that the government has actually done enough already to cushion the downturn.

I’m still thinking.

One final note: The Columbia Journalism Review wrote a weird piece about the Lahart story. Ryan Chittum wrote:

The Journal is too contrarian for the sake of it in an Outlook column positing that the economy could be in for a sharp recovery….

Too contrarian? Is Chittum suggesting that this story should not have been written? Is he saying that only stories which fit the prevailing negative narrative are acceptable?

I don’t get it. By my lights, one of the main roles of economic journalism is to tell the stories that no one else is telling—good or bad. Lay out the arguments, and let the readers decide for themselves—which is what Lahart did.

Frankly, I think we need more economics stories that are contrarian, not fewer. That’s what we needed during the boom, and that’s what we need during the bust. End of story.

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Reader Comments


February 11, 2009 07:34 PM

While the recovery may come sooner than expected (and we do hope it does), we are not returning to 2005 again. Banks will no longer be writing zero or 3% down interest-mostly loans to people who intended to flip the property and never had any intention of paying down the loan.

That will tamper demand for housing, keeping home price appreciation close to sanity. And that means the home equity ATM will be closed as well.

The credit-based consumption of recent years is gone. And without that credit-based fuel, the rise out of this depression will be sluggish, not a rocket shot back to partying like it's 2005 all over again. In a word, we will be returning to "normal".

What happened before was not "normal" - too bad most economists were drunk at the time and did not notice the problems.


February 12, 2009 06:35 AM

Recession ends in Q309. 20 months total. Brief jobless recovery extends beyond that.

Bull Run

February 17, 2009 02:06 PM

The recovery is looking more like the letter"M", than a letter"V". The real concern isn't the stock market, but the US treasury market, and will the world be willing to continue it's purchase of US debt, considering their own problems. The 30yr. treasury on Friday the 13th, fell $22 dollars, and I'm guessing that yields of 4% are not far off.


June 13, 2009 08:19 PM

Think about the reasons this thing happened -not a natural tech cycle like the rise and fall of dot-com, but a serious tampering with stock trading rules and artificial inflation of debt values. This is a "poke" into an elastic material that may not be perfectly inelastic (meaning there is some energy loss in the material), but for the most part it is in fact a V-shaped recovery. It may be phase-adjusted (meaning it takes a little longer for outgoing part of the V to come back), and there is concern about the recovery so that affects the V. But without a natural cycle we cannot accept that it is a normal recession - the economy will be at 90% of the level of July 2008 by Aug 2009. Why use physics to analyze the economy? Because it is a dynamical system with balancing rules and all such systems follow the same laws of conservation energy/momentum.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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