Rolf Englund IntCom internetional
"risk that the adverse impacts will be felt for the rest of this decade and beyond"
The debate about recession is now about how deep and global its impact will be.
It is possible that pessimism will recede as declining interest rates and dollar exchange rates increase demand. It is more likely, though, that the situation will deteriorate further as perceptions of declining growth increase credit spreads and risk premiums in financial markets, leading to reduced lending, borrowing and spending exacerbating the pessimism about growth.
Proper policy regarding valuing assets and forcing their sale depends on distinguishing between prices that reflect fundamentals and prices that reflect current illiquidity. Good policy is art as much as science, depending as it does on market psychology as well as the underlying realities.
Mr Strauss-Kahn’s dramatic change in stance amazed Larry Summers, the former US Treasury secretary. He is known for saying that the IMF stands for “It’s Mostly Fiscal” because the organisation has to be tough with countries’ budgetary laxity.
Why America must have a fiscal stimulus
Six weeks ago my judgment in this newspaper that recession was likely seemed extreme; it is now conventional opinion and many fear that there will be a serious recession.
The question is whether it is better for all the stimulus to come from discretionary monetary policy or for some of the stimulus to come from discretionary fiscal policy.
Beyond policy mix considerations there is the desirability of maintaining stable demand by insuring against excessive declines in consumer spending that lead to reduced employment and further declines in incomes and spending
Fiscal stimulus is appropriate as insurance because it is the fastest and most reliable way of encouraging short run economic growth at a time when a serious recession downturn would pressure American families, exacerbate financial strains, raise protectionist pressures and hurt the global economy.
Wake up to the dangers of a deepening crisis
The housing sector may be in free-fall
It is now clear that only a small part of the financial distress that must be worked through has yet been faced.
Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years.
In such an environment, economic policy needs to be governed by the clear and public recognition that restoring the normal functioning of the financial system and containing any damage its breakdown may do the real economy is the central macro-economic and financial challenge facing the US.
First, maintaining demand must be the over-arching macro-economic priority.
All of this may not be enough to avert a recession. But it is much more than is under way right now.
Will the dam break in 2007?
The Next Dominos: