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Tuesday, February 12, 2008

Recession or Not?

William Poole says it's only a flesh wound:

Fed's Poole Says 'Best Bet' Is Economy Will Avoid a Recession , by Vivien Lou Chen and Anthony Massucci, Bloomberg: Federal Reserve Bank of St. Louis President William Poole said that the U.S. will probably avert a recession and that the Fed's interest-rate policy is appropriate for the slowing economy.

''The best bet is that we will not have a recession,'' he said... ''My take on the current policy situation is that policy is at a good place for both the long-run concern and for cushioning the impact of financial disturbances.'' ...

While consumer spending is ''soft,'' that is ''completely different from crashing,'' Poole told reporters.. ''It's a very different story so far from some of the past recessions that I remember living through, when things really plummeted.'' ...

''Those companies and industries directly connected to housing are in somewhat of a retrenchment mode,'' Poole said. ''But they're not in a survival mode. They're worried about profitability. They're not worried about survival. There is a big difference.'' ...

Janet Yellen says it may be a bit more than a mere flesh wound, but hopefully the Fed can prevent any further damage:

Fed's Yellen sees weak growth, but no recession, Reuters: San Francisco Federal Reserve Bank President Janet Yellen said on Thursday that the United States faces several quarters of "anemic" economic growth but will probably not fall into an outright recession."

Still, risks to growth for the near term are skewed lower, and as a result a slowing economy could create greater caution by lenders, households and businesses, dragging growth down even more, Yellen said.

"An important objective of Fed policy is to mitigate the possibility that such a negative feedback loop could develop and take hold," Yellen said...

Yellen said the Fed's recent string of interest rate cuts had pushed the real, or inflation-adjusted, federal funds rate to about 1 percent, "an accommodative posture." ...

There are those, however, who believe the wounds are more severe:

Forbes Reporting on the Financial Meltdown Scenario, by Nouriel Roubini: The idea that I presented in a recent article that we face the risk of a "financial meltdown" is becoming more mainstream. Today Munchau in the FT discussed it by analyzing the risk of a Great Depression style of debt-deflation; he argued that such a scenario - or a Japanese style decade long stagnation - is unlikely.

I do agree that such a scenario of a protracted economic US stagnation is unlikely... But I believe that cannot rule out a severe short-term (as opposed to long-term) financial meltdown that will lead to a severe and painful US recession and global near recession. While the chances of ending up in a Great Depression or Japan decade long stagnation scenario are very low, the chances of a severe recession and a systemic financial crisis more severe than we have had since the 1980-82 recession are now high. And my view is that the ability of the Fed and policy makers to avoid such as systemic financial crisis is highly limited.

And here is ... an article from Forbes magazine reporting on my financial meltdown scenario:

Out Front Look Out Below, Robert Lenzner 02.25.08 Forbes magazine: If you   get depressed easily, don't read this story. Here's one sage's prediction of a   long, deep recession.

It may be time to christen a new Dr. Doom. The candidate: Nouriel Roubini...   He makes the old Dr. Doom, bond pessimist Henry Kaufman, look like Dr. Phil.   No mincer of words, Roubini thinks a full-blown panic will scorch the global   economy. He recently laid out his scenario for central bankers in Davos and   had them chewing it for hours.

He thinks the immediate spark will be the collapse of bond insurers...   Roubini says lower rates won't help. There are significant risks of   insolvency. Here's his prediction of how it'll play out:

Bond Insurers Lose the Triple-A... Contagion Spreads... A Protracted   Recession Ensues...

Roubini says the U.S. went into recession in December and will stay there   for at least a year. ...

I want to believe that this will only be a minor event, a mild slowdown perhaps but nothing to get too worried about, but that hope is getting harder to sustain.

    Posted by on Tuesday, February 12, 2008 at 02:18 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (60)

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