US Bank Economist: Recession Imminent
Submitted by
CalculatedRisk on Tue, 09/13/2005 - 5:07pm (19 comments)
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Isn't it always a question of when?
In other words, we haven't licked the business cycle.
Will the prime rate be lowered then as it was during last recession?
What would that do create another housing boom?
Tucker is right. A recession is almost inevitable in 2006 or 2007.
It is a perfect storm:
1) High Energy Prices
2) Housing Bubble popping
3) Trade Deficit ( ~750 billion)
4) Offshoring
5) Fed Deficit / Debt
6) Personal Savings rate at 0 and 70% of the economy is driven by consumer spending
7) Massive Consumer Debt
It is a sad state of affairs.
I find it interesting that the US Bank economic forecast thinks asian central banks may stop buying US treasury due to a chinese economy crash. It's the first time I've read that. I will need to go read the full report.
Mike Mussa from the IIE also predicts a slowdown of the global economy and a lower US growth for 2006 and 2007. He doesn't rule out a recession in the US, but he says the risk is small.
Yoda,
The fed would lower the rate to fight the recession. But that doesn't guarantee the creation of a housing boom. If people don't have jobs, they won't be buying homes.
How many recessions has the country been through?
Adams continues to be concerned about consumer debt, unsustainable housing price increases, and high oil prices.
Of those the first one - debt - will be the killer. The others (RE bubble & energy) willdampen the economy but throw in debt and they be come toxic.
Yoda - I doubt they the Fed is going to allow another unsupported asset bubble to form (unsupported by economic fundementals that is)... So I wouldn't look to the Fed to reignite the houseing bubble... The Jackson Hole speeches a month ago were pretty clear... they want to get the money out of RE into productive activities...
People still have to live somewhere... so RE will still havesome fundemental value... but I would NOT look for a repeat of the mania we are in now.
A bigger concern might be that we go into recession & the mania persists - stubbornly hangs on - and as a result AG is slow to drop rates.
We'll have to wait & see.
REgardless - debt levels will be the killer - I'm sure of that.
So what should folks be doing with their money if they have anything saved?
I'm for perhaps burying it in back yard.
QUOTE:
Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages. When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one is paying attention. The bursting of the housing bubble will act as a detonator for a massive pension crisis. "
in recent months, Greenspan has repeatedly denied the existence of a national housing bubble by drawing on the conventional wisdom that the US housing market is highly disaggregated by location, which is true enough. Disaggregated markets are normally not exposed to contagion, a term given to the process of distressed deals dragging down healthy deals in the same market as speculator throw good money after bad to try to stem the tide of losses. But the bubble in the housing market is caused by creative housing finance made possible by the emergence of a deregulated global credit market through finance liberalization. The low cost of mortgages lifts all house prices beyond levels sustainable by household income in otherwise disaggregated markets.
ENDQUOTE
Asia Times Online :: Asian news and current affairs
So does this mean that as more and more foreclose it hurts the pensions of more and more people?
So If my neighbor loses his or her house I can lose my pension and the bankers stay rich?
If I lose my pension then I have no money to live on thus cannot get money from the bank so the banks have no customers and need to change and create some form of risk to stay in business.
How do they attract millions of Gen x and Gen y's to put mula in the bank?
They will not have to because their parents the Baby Boomers will be willing it to them in the trillions.
Gen xer's and Generation Y the children of the Baby Boomers will care less about a pension crisis because their pension will come from Mom and Pops.
JMHO
This is a comical analysis. If the Chinese economy crashes, DUH. If Asians stop buying American debt, DUH. The economy will grow at 3% next year, except that the world may come to an end, DUH. Ponzi, DUH. 1929, DUH. Nonsense.
Find another bank economist, because this one is comical. There may be a significant slowing or even a recession, but please find an economist who knows something.
We are at a fork in the road with the glass half full, waiting for Ponzi. Samuel Becket would be proud. At least we have to know who the fools are. Were I investing with the bank be sure I would find another bank, but there is a reason represented here why I would never think of investing with a bank.
Jennifer, thanks for the laugh. My view on a possible recession in '06 continues to be based on the economic impact from a slowing housing market and, more recently, energy prices. As far as the other possible reasons offered by Dr. Adams, I agree - Duh!
I posted this because it was interesting that a Chief Economist would be arguing a recession was "imminent".
Best to all.
Jennifer,
I just skimmed through the report. To be a little bit fairer to the report authors, the conclusion is not meant as an analysis. They actually predict a 3.0 GDP growth in 2006 (which is higher than Mussa's forecast).
Their conclusion is just a major case of CYA. In case we see a recession in 2006 or 2007, they want to be able to say they didn't rule it out...
JMHO
The bankers actually the execs will have had their bonuses and moved one. What happens another day is not their problem. With luck it will be on someone's watch. The point being that the profits are made with little or no risk. What happens in the future is up for grabs.
We can spend more then we make and go into debt or go into recession and go into debt. It seems doubtful we bring our debt under control without precipitating a recession, and it seems equally unlikely a recession would bring our debt under control without widespread defaults. The Fed would lower interest rates but would likely act too little and too late to avoid a recession. Creating an asset bubble is the only method the Fed has to inject liquidity into the system which it will do at all costs to avoid deflation, but whether they can avoid depression is questionable.
A crisis in China could lower import prices and give the US some breathing room. They could start buying US products, what few exist, and also provide some breathing room.
The more economists that predict a recession will lead to the mind set that produces one.
In short more and more players will wonder if the current paradymn is correct. They will adjust their expectations and investments and or consumption will follow.
After all, the housing bubble did not happen because millions of folks went out and bought a house, it happened because they expected to make a profit or to seize an opportunity based on expectations presented by experts.
Thanks CR and all
There are real worries, but we can separate those from flying squirrels.
David J - another possible driver for the perfect storm: global warming. We're now at CO2 levels not seen for 10s of thousands of years. No one really knows what the full implications are, nor how fast we will reach a new equilbrium based on these new levels. The hints we are getting so far indicate that changes are occuring more rapidly than expected.
You mentioned "high energy prices." If the peak oil folks are correct, and we should know soon, then the correct term would be "high and increasing oil prices," perhaps somewhat moderated by the recession/depression.
The 'climate change' global warming wild card is something to consider- something is going very wrong climatically- and the naysayers who pooh pooh the obvious warnings are playing with fire. From what I have been reading changes are occuring far faster then many of the computer models have anticpated- therefore it might be prudent to include this scenario into the economic stew-and quickly.