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"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.
Lawrence Summers, FT January 27 2008
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.
“This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face,” said Mr Summers.
Why America must have a fiscal stimulus
Lawrence Summers, FT January 6 2008
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 odds now favour a US recession that slows growth significantly on a global basis.
There is the risk that the adverse impacts will be felt for the rest of this decade and beyond.
Lawrence Summers, FT November 25 2007
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.
Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.
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?
Joseph Stiglitz, The Guardian 27/12 2006
The Next Dominos:
Junk Bond And Counterparty Risk
one of the more important editions of Outside the Box this year. This is a must read. You absolutely need to understand the nature of the systemic risk we are facing, and Ted does a great job of explaining in very clear terms the nature of the risks that we have created in our modern markets.
Ted Seides at John Mauldin 26/11 2007