Another Economist Says NO Recession
We still don’t have conclusive evidence that we’re in a recession, and we might avoid one altogether. A credible case could be made that we’re facing just one quarter of negative growth, and that GDP growth will be back in positive territory during the remaining three quarters of 2008.
"Are We In (Or Headed For) a Recession?," by Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor
7 Comments:
Wrong the next bank failure is waiting in line, Bear was only the beginning of this train wreck. Dollar will crash on futher FED rate cuts launching commodities higher wich will suck the life out of an over indebted consumer leading to more bankruptcies draging down corporations along with them. It's contained baby
Anon. 9:00,
The fact remains that the U.S. has not experienced 2 quarters of negative growth required to declare a recession. One notes that you have not addressed this fact in your post.
The worst part of this crisis is that the government will bail out both financially irresponsible citizens and businesses at great cost in the name of social good. Washington is poised upon greater interference rather than allowing the market to correct itself doing the necessary housecleaning such as writing off non-performing loans and greater regulations making the entire situation more difficult. Wall St. senses a bail out is imminent so why should they make any tough choices if the government will pony up.
Part of the problem has been legislation designed to force banks to loan to those with poor credit that was introduced during the Carter administration. Any attempt to price in risk is labelled as preditory. The fact is that there are people who have bad credit for a reason. These folks do not know how to manage their financial affairs well or even adequately. Financial literacy is not going to improve by giving these borrowers more rope to hang themselves.
If anything can guarantee a recession, it will be the usual hamhanded regulation, and economic command & control courtesy of Washington politicians intent upon "doing something".
Anon 12:03 said
Any attempt to price in risk is labelled as preditory.
"Liar loans" were just plain stoopid. The lenders don't escape responsibility on that one.
Borrowers who lie about their income or inflate their assets to get a loan, pay their bills with credit cards at the highest rate of interest, draw down the equity in their homes to support out of control spending are also responsible for their actions. Visiting a bankrupcy forum is a real eye opener.
The reality is that there are people who have never learned financial management skills. The reality is that those who go through 1 bankrupcy are likely to go through another bankrupcy (and sometimes multiple bankrupcies) because they did not learn from their first bankrupcy.
The first step toward solving a problem is facing it. It is often very difficult for people to actually face that they have a problem. Often there is denial or blaming. When you have a problem, you have to take responsibility for it. Certainly, there can be contributing factors but it takes 2to make a loan, a lender and a borrower. Each has responsibilities.
One cannot assume that all wrongdoing is all on one side especially if a person has a pattern of getting into financial problems.
Borrowers who lie about their income or inflate their assets to get a loan, pay their bills with credit cards at the highest rate of interest, draw down the equity in their homes to support out of control spending are also responsible for their actions. Visiting a bankrupcy forum is a real eye opener.
The reality is that there are people who have never learned financial management skills. The reality is that those who go through 1 bankrupcy are likely to go through another bankrupcy (and sometimes multiple bankrupcies) because they did not learn from their first bankrupcy.
The first step toward solving a problem is facing it. It is often very difficult for people to actually face that they have a problem. Often there is denial or blaming. When you have a problem, you have to take responsibility for it. Certainly, there can be contributing factors but it takes 2to make a loan, a lender and a borrower. Each has responsibilities.
One cannot assume that all wrongdoing is all on one side especially if a person has a pattern of getting into financial problems.
@ Anon 12:38
"...there should be no doubt about who is really responsible for the subprime woes. The investment banks employ some of the country's "best and brightest" -- sharp guys who have studied at some of our finest colleges and universities. Does anyone really believe that a Harvard MBA -- who understands all the fine-points of high-finance -- really thought that ignoring all of the standard criteria for prudent lending, and issuing trillions of dollars in loans to applicants who had no job, no collateral, bad credit, and were unable to come up with a few thousand dollars for a down-payment -- was a great idea?" ~ Mike Whitney
http://mjperry.blogspot.com/2008/01/subprime-arms-are-only-7-of-loans.html
Anon 1.17,
Above post notes that sub-prime represents only 7% of all outstanding loans. There is another element beyond dubious lending practices to dubious borrowers.
The real problem is the use of securitization to create mortgage backed securities that can be sold to a third party. What drives this crisis isn't that all of these assets represent bad debts but that the market for these securities has dried up.
Bear Stearns for example has a building worth $8.00 per share (total assets are worth $80.00 per share) and has just accepted a deal for $2.00 per share. Does it mean that a hard asset like a building in Manhattan is worthless? No...but a building is not an asset that can be readily turned into cash. Bear Sterns faced a liquidity crisis due to a crisis of confidence.
The process of creating a debt, bundling debts into securities and then selling those securities to raise capital issue more loans that can be securities and sold for....round and round it goes until the entire system is overleveraged.
The liquidity crisis is the result of changes to the international banking rules, the Basel II. Several years ago, capital reserves required to be held to back loans and mortgages were increased to strengthen the international banking system. Loans and mortgages that were bundled together in the form of securities were exempt from the increased capital requirements. The result of the rule changes made securities more attractive than conventional mortgages. As econ students, we know people respond to incentives.
Basel II inadvertantly encouraged the creation of ARMs which were fine as long as there was confidence that the loans would perform. Once the sub-prime problem started to unwind, all of these vehicles were tainted by association and it was impossible to discern the good from the bad. The fact is that the system is overleveraged.
Yes, I agree, financial institutions are responsible for the credit crisis and for the quality of loans that they issue. It is however, mortgage securitization rather than sub-prime mortgages which are creating the ongoing problem.
Selling debt is a fairly standard practice in the business world. Sears for example, will sell aged receivables for a portion of their face value to a collection agency usually about 10 - 20 cents on the dollar. It is more expensive to try to collect the debt than to sell it to a collection agency like Asset Acceptance.
Like any business, Sears (or Bear Sterns for that matter) operates on the assumption that it will continue in business rather than assuming that at any given moment it will need to liquidate its capital assets and inventory.
The fact is that this is a very complex problem to be sorted and it's way beyond the miniscule percentage of sub-prime. The fed is trying to ensure that the liquidity is there to soften the process of de-leveraging and keep the crisis from escalating to sound institutions.
When one looks back at the bank runs and bank failures in the early 1930s, hundreds of sound banks failed because the Fed failed to act in preventing the failure of Bank of America. No bank can withstand a run because no bank retains 100% reserves.
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