How Will The US Economy Recover?
You would probably have to have been living on a remote desert island for the better part of two years to not see any signs of the slowdown in the economy of the United States. Since August of 2007, the real estate market has been reeling from plummeting house prices, due primarily to increasing defaults on sub-prime mortgages. While these mortgages were issued to millions of borrowers with patchy or relatively poor credit ratings over the past several years, interest rates remained unusually low before the Federal Reserve began to increase rates over 2005-2006.
Up until late 2006, this process was self-reinforcing, mainly due to the delayed impacts of interest rate changes, not to mention encouraging profits for lenders, who would often repackage the loans into securities which could be sold to investors globally. Many analysts called it a new era in risk management, justifying the arcane nature of many of these new investment entities with ever-larger profits.
But just as higher interest rates began to take their deflationary effects on the larger economy, millions of sub-prime mortgages began to reset, their rates immediately dependent on available credit. Moreover, many borrowers were not made aware of the insidious nature of their home loans.
Often, their interest rates are artificially low for some period of time, usually one to two years, and then change to reflect market rates afterward. These “teaser” rates were designed to lure more potential homeowners, and they worked: all estimates of the amount of sub-prime mortgages number in the millions, and many consumer advocacy groups have decried the skyrocketing incidence of “predatory loaning” leading up to the credit crunch. Defaults have continued to increase, which has forced the financial institutions which invested in mortgage-backed securities to write down billions, eventually leading to the spectacular collapse earlier this year of Bear Stearns, formerly Wall Street’s fifth-largest investment bank.
Since the securities made from these increasingly worthless mortgages have been so widespread, any effort towards recovery must first be focused on stabilizing borrowers, who are increasingly behind on payments. In this respect, the government has taken several different courses of action. In an effort to stop unnecessary foreclosures, the US Treasury has begun an initiative to freeze mortgage payments at current levels for qualified recipients. However, its restrictions make less than 5% of homeowners eligible for the program.
In addition, the Treasury has introduced a plan to reorganize and regulate the lending industry over the next several years, which should help streamline the financial system in the future. However, its greatest effect so far has been to distract from more immediate economic problems.
By far, the greatest player in the recovery effort has been the Federal Reserve, which reversed its previously hawkish view to drop mortgage interest rates multiple times, from 5.25% last summer to 2.25% now, with a further cut of 25 basis points highly likely at the next meeting. They have also taken the unprecedented move of making its “discount window” rate loans available to investment banks. This access has historically only been available for commercial banks up until this point as a matter of last resort, but by bailing out Bear Stearns, the Fed made a commitment to help troubled investment banks weather the credit crisis. A recovery will require a combination of liberal monetary policy, further government intervention on behalf of mortgage holders, and enforceable regulation in order to prevent another bubble.
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18 Responses
I see a lot of Republican versus Democrat arguments as though either side has anything to do with our interest rates or economy LOL. All i know is there are a few Rich men who really want a global currency and if you have to go hungry then so be it a few serfs are expendable. How can a government official or beurocrat decide how much mu hour of labor is worth?
I’m giving the democrats one last chance before I jump ship. If Obama doesn’t bring everything he promised and a bag of chips, the democrats can kiss my ass after this election cycle. But I have hope for now and I am holding my breath.
Hyperinflation is very unlikely to occur (although not entirely impossible; there is in fact a hedge fund in the market which is betting on very high level inflation, if not hyperinflation!)
But it is an ongoing debate among economists whether or not the current policy of the US Treasury and the Fed will eventually translate into higher inflation levels, and how the US lawmakers will interfere with the economic policy of the Fed and the Treasury.
Greenspan, for example, said recently: “It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable with the Fed withdrawing its stimulus”.
If the current reflation policy is reversed too early, it may jeopardize the modest signs of economic recovery and throw the economy back into a recession.
Even if the economic recovery is robust, it is likely to remain slow with continuing high unemployment around 10% way into 2010. In this case, there is likely to be significant political pressure to maintain a expansive monetary and fiscal policy, increasing the risk of higher levels of inflation.
For what it is worth, the general consensus among economic forecasters is that the current negative inflation will increase to 1% in the 4th quarter and to a level of 2.45% on average by 2011 (lowest estimate: 0.7%; highest estimate: 5%). Still far away from the two digit inflation rates of the 1970s or even hyperinflation.
In varied parts of Ohio: women who only appear to be wearing panties can set their price. America’s elitists {Luciferians} have their digs below ground, as did the Morlocks in the 1960 movie, starring Rod Taylor: “The Time Machine.”
In disparate particles called Cleveland {whereat non-Ohioan land is at a premium during negotiations} women with untethered mammae are of indefinable value. They too may set prices soaring.
I think so. We came out of the Depression and that may have beenf rom the war but I think that now people are smarter. We learned from the last depression. I also think classes about finance in school would help. They teach people Calculus instead of how to manage credit and then wonder why we are in a financial crisis.
You probably won’t vote republican, so you’ll try a third party, and if they fail you too, as they most likely will, will you move out of the states? Just curious.
Our grandparents saw the great Depression..and got out ot it…of course we can
The whole crisis revolves around what the U,S, dollar is worth. To you, to me, to Chinese, to Arabs, It is only worth what we “think” it is worth. It is a crisis of thinking. So delude yourself, world, and all will be fine
If unemployment was at 15% I would worry, but it will *never* get that bad.
6% unemployment is within the "natural unemployment" rate, so the economy is not as bad as the media hypes.
Every 10 years or so an economic sector goes through this type of shakeup and it's always a result of bad investments.
By January, we should be well out of this mess.
lol wow I was going to comment on this, and will but first. I live in your listed hometown… weird. As for voting Republican….I see you haven’t realized Bobbie that it is a 2 headed 1 party system yet. If you want change, and I mean real change….Vote 3rd Party. Independent, Constitutional, Libertarian….Anything except the 2 headed political monster I like to call Demorepublicanism.
for those that lost loved ones in an unjust war ( no attack on the troops themselves)… an eternity
Well its none of my business who you support, and you have every right to but the one thing I learned since a young age (and this is why i registered Independent) is that everything a candidate says is just for votes. I have never seen once in my life is one of them live up to what they said. I haven’t seen many presidents, but you don’t need to in order to catch a hint…lol
Too long :
I'd be surprised if we really got over it within a decade. Obama has showed some signs of life in the economy, but barely a dent relative to what Bush did to it.
@mushmouth4life: Haha what? Sweden hasn’t got a resource based economy. Unfortunately Sweden is a capitalist country run by capitalist pigs just like your country.
I’ll probably get back in line and shut up like most other Americans. I might move. I might bitch louder than I usually do. It’s easy to conjecture from my asschair but I don’t really know what I’ll do until that situation arises.
All three.
Spending keeps the economy moving. Without spending, employers cannot pay their employees, so they have to fire some. Less spending means less selling which means the manufacturers need to cut production. Cutting production means that there is a less need for mining, importing, and gathering of natural resources to manufacture goods. Less employees means less insurance needed. Less insurance needed means insurance companies need less employees.
Saving money helps banks. When people get scared and lose faith in banks and start pulling their money out is when banks start needing bailouts or start to have outrageous fees. If you are nervous I would strongly consider finding a local bank that only exists in your area. These banks are more people and community oriented and don't seem to have the same "recession issues" that the larger banks are having now.
Paying off your debt helps you raise your credit score, which in turn gives you better rates for loans. Better rates for loans means that you are more inclined to buy larger goods, like a house or a car.