Sunday, October 19, 2008

Experts Say U.S. In It For the Long Haul

Sources: Financial Times, U.S. Faces Worst Recession in 26 Years; Washington Post, White House Aide Says Parts of U.S. In Recession

Officials at the Federal Reserve and the Department of the Treasury said that the U.S. is headed for its worst recession since 1982. While those same officials are confident that the $700 billion bailout plan can stave off another Great Depression, it is still unclear how deep and long the recession will be.

Meanwhile, a White House Aide said that parts of the country have probably already experienced a recession, which occurs when the economy shrinks for two consecutive quarters. Though political leaders are loathe to use the word, especially this close to a major presidential election, the chairman of the White House Council of Economic Advisers noted that some parts of the country, such as California, have already witnessed an unemployment rate higher than the national average of 6.1%. Officials at the Fed and Treasury expect the national rate to reach as high as 7.5–8% before the recession ends.

Officials and experts expected the economy to weaken, but not as quickly as it has. A “credit freeze,” both in the U.S. and abroad, has resulted in falling home values, collapsing consumer confidence, slumping retail sales, and falling industrial production. Policymakers hope that the $700 billion bailout plan will allow the credit freeze to thaw more quickly and put the country on the road to recovery, through financial expansion.

Economists caution that a higher savings rate could contribute to exacerbated conditions, as rising unemployment continues to threaten mortgage defaults and shrinking retail sales. All of this could also cause more corporate defaults, which might cause a second wave of bank troubles.

Some experts say that further pain can be avoided by the Fed cutting interest rates down from 1.5% to 1% or even lower, but the Fed does not see cutting rates as the best solution, and instead is more concerned with bank recapitalization, asset purchases, borrowing guarantees, and Fed commercial paper purchases. Democratic lawmakers are considering a post-election stimulus package, running around $150 billion, that would boost employment with bridge and road projects—but economic officials say that such plans are too “long-term” to have any immediate effect on the economy.

Questions for Discussion:

1) Do you think the U.S. is headed for a quarter-century recession? Global markets today are much more integrated than they were in 1982; can a U.S. recession be ameliorated by the success of other countries’ bailout plans?

2) Would a post-election stimulus plan be worth the money? The 2007 Economic Stimulus Package was not enough to stave off this crisis; will one that creates jobs have a different effect?

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