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Bev-enomics!

Beverly blogs about economics

You Can Almost Hear It Pop

By STEPHEN S ROACH
December 16 2007
The American economy is slipping into its second post-bubble recession in seven years. Just as the bursting of the dot-com bubble led to a downturn in 2001 and ’02, the simultaneous popping of the housing and credit bubbles is doing the same right now.
This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13 percent of the country’s gross domestic product. The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P.
Consumers have no choice other than to retrench. Home prices are likely to fall for the nation as a whole in 2008, the first such occurrence since 1933. And access to home equity credit lines and mortgage refinancing — the means by which consumers have borrowed against their homes — is likely to be impaired by the aftershocks of the subprime crisis.
Consumers will have to resort to spending and saving the old-fashioned way, relying on income rather than assets even as mounting layoffs will make income growth increasingly sluggish.
For the rest of the world, this will come as a rude awakening. America’s recession is likely to shift from homebuilding activity, its least global sector, to consumer demand, its most global.
There is hope that young consumers from rapidly growing developing economies can fill the void left by weakness in American consumers. Don’t count on it. American consumers spent close to $9.5 trillion over the last year. Chinese consumers spent around $1 trillion and Indians spent $650 billion. It is almost mathematically impossible for China and India to offset a pullback in American consumption.
America’s central bank has mismanaged the biggest risk of our times. Ever since the equity bubble began forming in the late 1990s, the Federal Reserve has been ignoring, if not condoning, excesses in asset markets. That negligence has allowed the United States to lurch from bubble to bubble.
Fixated on the narrow “core inflation” rate, which excludes the necessities of food and energy, the Fed has ignored new and powerful linkages that have developed between economic activity and increasingly risky financial markets.
Over time, America’s bubbles have gotten bigger, as have the segments of the real economy they have infected. The Fed needs to rethink its reckless, bubble-prone policy. Once the current crisis subsides, the economy will require the tight money of higher interest rates — the only hope America has for breaking the lethal chain of endless asset bubbles.

We need stronger government actions.

A recession is at the door as Stephen Roach explained above, we need strong measures from the feds to put an end to this situation since the current and recent proposed plan is not good enough (the markets know it and that is the cause of  their poor performance). The implementation of strong actions as for instance a freeze on mortgage interest rates or an special line of credit with low interest rates for those home owners with subprime loans so that they can pull out of the crisis they face at present, a crisis with a name: foreclosure    

Published Dec 18 2007, 03:02 AM by beverly
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