U.S. Sen. Charles Schumer cut right to the chase Thursday when Federal Reserve Chairman Ben Bernanke paid a visit to Congress’ Joint Economic Committee. The New York Democrat asked the question on everyone’s mind: Is there a recession just around the corner?
The financial news hasn’t been cheery, after all. Housing values are falling in many markets. The crisis in subprime lending is spreading misery in places low and high. On Wall Street, major investment firms are dumping their CEOs as bad mortgages bleed into the wider credit market. Meanwhile, oil prices are pushing $100 a barrel. That trend and the weakening of the dollar threaten to raise the price of imported goods and reignite inflation. China is said to be reconsidering its vast holdings in dollars. Retailers are worried about holiday sales. So, with this confluence of bad tidings, a question about recession seemed in order.
Bernanke’s answer wasn’t all that reassuring. The Fed hadn’t calculated the probability of recession, he said. But weaker economic growth and higher inflation were possibilities through the first part of next year. His words evoked memories of the stagflationary 1970s, and sent both the dollar and the stock market downward. The Dow opened today’s trading 329 points behind for the week.
“The Fed is in a tight spot,” Weiss Research analyst Mike Larson told CNN.com. “It’s hard to combat deflation in housing and inflation in commodities spurred by a falling dollar at the same time.” Speculation rose among analysts that the Federal Reserve Board would lower a key interest rate at next month’s meeting, following rate cuts in October and September.
But just how much of the credit crunch and oil-price spike will spill over into the wider economy seemed the bigger question. “We need to pay the price for living for many years beyond our means,” Steven Pearlstein, the Washington Post economics writer, told PBS’s “News Hour.” “We have to take a decline in our standard of living to make up for all this money that we have borrowed, ” he said, apparently referring to both the $800 billion-a-year trade deficit and the government’s attempt to finance both President Bush’s tax cuts and the war in Iraq.
One signal of distress is the uneven geographical performance of the economy in recent years. A study of GDP growth in metropolitan areas by the Bureau of Economic Analysis showed stronger economies along the south Atlantic coast from Florida to Washington, D.C., and in the West, from Austin, Texas and Denver to the southwest and up the coast to Seattle. Weaker economies — including Minnesota’s — were bunched along the Mississippi River and Ohio River valleys and around the Great Lakes. The study covered the first half of the decade.
But how about the second half? How bad might things get? BBC economics reporter Steve Schifferes examined six historic events, including the the dot-com burst of 2000, the market crash of 1987 and the savings and loan scandal of 1985. Four key lessons emerged, he said: Globalization increases the frequency and spread of crises, but not necessarily their severity; early intervention by the central bank is most effective; it’s hard to tell if a financial crisis will have broader implications, and regulators often cannot keep pace with “innovations” that trigger the crisis.
In the current instance, “innovation” seemed to involve the notion that home ownership for people who couldn’t otherwise afford payments on dubious mortgages was a good idea as long as their debt was bundled with more conventional loans and “managed” by Wall Street high-fliers with built-in incentives to take risks. That sounds pretty silly now, and more than a little tragic. More heartache is expected next year when many adjustable-rate loans are due for hikes.
Younger families may be especially hard-pressed, with little savings to fall back on, according to MSNBC’s Jennifer Alsever. “Nearly half of the 5,000 Gen Xers surveyed by Charles Schwab this year said they are so saddled with debt or live on such tight budgets that they can’t even think about saving,” she wrote.
If it’s any comfort, tangible wealth is overrated, according to a new article by Ronald Bailey at Reason.com. He cites a 2005 World Bank study, concluding that solid goods amount to only about 20 percent of the wealth of rich nations. The report, “Where is the Wealth of Nations?” found that “human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth” in most countries. The bank devised an index heavily weighted toward social institutions. Switzerland scored 99.5 out of 100 and the United States got a 91.8. Nigeria, by contrast, registered 5.8 and the war-torn Democratic Republic of the Congo a miserable 1.
Maybe that puts the jitters on Wall Street and Main Street into perspective.
Steve Berg, former Star Tribune national correspondent, writes Cityscape for MinnPost.com.