US Faces Severe Recession, Feldstein Says
Kurt Brouwer March 14th, 2008
Martin Feldstein is a distinguished economist who has studied business cycles for many years. This statement indicates his deep concern over the credit crunch that is the primary cause of our current economic slowdown [emphasis added].
US Faces Severe Recession, Feldstein Says (CNBC / Reuters, March 14, 2008)
The United States has entered a recession that could be “substantially more severe” than recent ones, former National Bureau of Economic Research President Martin Feldstein said
“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.
NBER is a private sector group that is considered the arbiter of U.S. business cycles.
Feldstein said the federal funds rate is headed for 2 percent from the current 3 percent.
This point is no great mystery. Most observers believe the Federal Reserve is going to continue lowering short-term interest rates for a while.
His next point is one that we have discussed as have others. This economic slowdown is not a typical recession, but rather it is more of a financial panic or credit crunch brought on by the subprime lending mess. Therefore, reductions in the Fed Funds rate will not necessarily have the same effect they would have in a more normal economic slowdown.
He added that lower short-term rates from the Federal Reserve would not have the same impact in the current downturn, in terms of reviving economic activity.
“There isn’t much traction in monetary policy these days, I’m afraid, because of a lack of liquidity in the credit markets,” he said.
The Fed’s new credit facility, announced on Tuesday, “can help in a rather small way … but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital,” Feldstein noted…”
Apparently, Mr. Feldstein believes this recession will be unlike the two most recent recessions — 1990-91 and 2001. Other observers think this economic slowdown has many similarities to that of 1990-91, which was also driven by a sharp reduction in real estate prices.
Today’s announcement of a ‘run on the bank’ at Bear Stearns bears out the last point he made (see JP Morgan, Fed Move To Bail Out Bear Stearns). The financial markets are struggling to sort out the risk level of financial institutions and this uncertainty breeds nervousness in the viability of our financial institutions because no one is exactly sure what is going on.
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