It's been over six years since the end of the last recession, which turned out to be a shallow and short-lived one. Since many economists believe that this current economic slowdown might very well already be a new recession, it's interesting to ask if it will be short and shallow or long and severe. Three characteristics of the current economy point to the latter:
First, Wall Street hasn't yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody's Economy.com. They're not being dishonest; they just haven't untangled all of their complex investments.The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: despite the recent declines, stock prices and home values have still not returned to historical norms.
And third,
Consumer spending kept on rising for the last 16 years largely because families tapped into their newfound wealth, often taking out loans to supplement their income. This increase in debt - as a recent study co-written by the vice chairman of the Fed dryly put it - "is not likely to be repeated." So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one.
The future is always unpredictable. That's why we have this legalized gambling forum called The Stock Market. Nonetheless,
...it's hard not to believe that the economy will pay a price for the speculative binge of the last two decades, either by going through a tough recession or an extended period of disappointing growth. As is already happening, banks will become less willing to lend money, households will become less willing to spend money they don't have and investors will become more alert to risk.
Food for thought...
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Tags: economy, Federal Reserve, recession, stock market
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