Recession Fears

Economist Mark Weisbrot writes:

No, the US Federal Reserve has the capacity to provide enough liquidity so this crisis can be smoothed over.

But it's not going to end the bankruptcies of institutions that are financially insolvent, including some major banks.

The problem is the real economy [ie. not the financial markets], which is on a downwards path because of the housing bubble, and it will continue even if banking crisis is resolved.

There have been a lot of crisis in the last 40 years and this happens to be the worst one since the US depression (in the 1930s) but I wouldn't exaggerate it.

It is not like the 1930s, we have learned from that period. This time the Fed and banks have pumped hundreds of millions of dollars of liquidity into the market and as long as they are willing to do that we should be able to minimise the impact of the credit crunch on real economy.

'Serious recession' fears

The economy will slow down because consumers are not borrowing against their homes as they did since 2001 when the last recession ended, that is what drove the last recovery – rising home equity. That process is now in reverse.

The solution is fiscal policy, the government can make up for slowing demand – it did some work with the stimulus package and if willing to do more the US can neutralise the effect of recession.