Bernstein Warns: 'If China Goes, God Knows'

Investment expert and financial writer Peter Bernstein calls today’s economy the worst he has seen since the Great Depression.

The future, at least in the short-term, will be clouded by risk aversion, in Bernstein’s opinion. He sees equity and credit market disruptions well into next year, or longer.

"The people who think we will have turned in 2009 are wrong. There has to be a respite along the way,” he says.

A willingness to accept risk has led to growth and has been the driver of economic recovery in the past, Bernstein tells The Wall Street Journal, in an interview.

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Without that stimulus from an entrepreneurial spirit going forward, the economy may be trapped into slow growth, recession, or worse.

"We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U,” he says.

While previous recessions have ended when businesses increased investments, this economy has been driven lower by the consumer. This fact leads the esteemed market historian to note that this time it is different — and the many unknowns cause him to remain cautious.

"Somehow, the housing trouble has to at least flatten out,” Bernstein says, before the economy can resume its long-term upward trend.

"If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don't know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.”

To him, that means that consumer confidence and consumer credit will both need to turn higher to signal a bottom.

"We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth,” said Bernstein.

Asked what kinds of investments will do well in the eventual recovery, Bernstein suggested that stocks would be the better vehicle, particularly stocks beaten down by the uncertainty of late.

The author of nine books, including "Against the Gods: The Remarkable Story of Risk,” Bernstein blames easy credit and excessive borrowing by businesses and consumers for the current problems.

While he is optimistic that the recent actions of the Federal Reserve may prevent another depression, he cautions that there are no guarantees.

"You don't get into a mess without too much borrowing,” Bernstein says.

"It was like [former New York Gov. Eliot] Spitzer: ‘I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me.’”

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