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History Reveals Odds Of Recession Snowballing Into Depression

With the market in a tailspin there’s been a lot of talk of history repeating itself. But is that, in fact, what’s happening?

According to Harvard Professor Robert Barro the short answer is yes . In the Wall Street Journal he takes a hard look at other downturns and just how severe this one will be – based on those of the past.

We were so intrigued by his op-ed piece that we invited Barro to be our guest on Fast Money

Barro tells us he pretty much looked at 251 stock market crashes (yes he considers this current decline a crash) from 34 countries since the late 19th century. Then he found patterns between these sharp declines and how often the economy slipped into depression.

Avoiding a Depression

And by examining these patterns he tells Fast Money there's a 30% chance that the current recession will snowball into an economic decline of 10% or more --  the hallmark of depression.

That’s right, there’s at least a 30% chance -- not one-in-five -- as reported in the Journal. He's become even more bearish since the article published.

Of course you can look at the glass as half empty or half full. If you're an optimist you can say those numbers suggest a far larger chance of avoiding depression, then falling into one.

In fact, if you look at history we’ve avoided depression several times despite pretty severe market crashes. According to Barro, by his criteria the market crashed in 2000-02 and also in 1973-74, and in each case we experienced only mild recessions.

“Hence if we are lucky the current downturn will also be moderate,” he concludes.

If that is indeed, how it plays out – as a moderate recession – then Barro expects the economy to recover in 2010. (Which is incidentally what Bernanke recently forecast.)

However if we slip into depression, Barro thinks it lasts 4 years. That would make our recovery in 2012.

What’s the bottom line? Let’s hope history does repeat itself and the market patterns of 2000-02 play themselves out, once again.

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Trader disclosure: On Mar. 5th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (GE) Puts; Macke Owns (MS), (SDS), (AAPL), (MOS); Najarian Owns (GDX), Najarian Owns (MS) & (MS) Calls, Najarian Owns (MSFT) & (MSFT) Call; Najarian Owns (X) Call Spread; Najarian Owns (V) & (V) Calls; Najarian Owns (WFC) & (WFC) Calls; Najarian Owns (DNA) Calls; Najarian Owns (DOW) Call Spread; Najarian Owns (FCX) Spread; Najarian Owns (GLD) Put Spread; Najarian Owns (GE) Puts; Najarian Owns (PNC) Put Spread; Finerman's Firm Owns (DNA) & (DNA) Calls; Finerman's Firm Owns (BAC) Preferred; Finerman's Firm Owns (WFC) Preferred; Finerman Owns (WFC) Preferred; Finerman's Firm Owns (PLCE), (MSFT), (PBR), (RIG), (TGT): Finerman's Firm Is Short (BAC), (BBT), (IYR), (IJR), (IWM), (MDY), (SPY), (USO) with wires