Corporate economists say recession odds are greater than 50-50
By John J. Pitney – January 7, 2008
The nation entered a recession last year. The U.S. economy’s momentum and confidence were shaken. Economic models, especially those built around expectations of rapid expansion, have not proven as accurate in forecasting the economy’s performance in the fall as economists had once believed them to be.
Economists at the nation’s top universities said they were divided about whether the recession was a cyclically driven one versus one driven by the recession in credit markets. Although a recession had been expected even a year after the end of a recession, not all economists were convinced that the recession was all that bad. More than a fourth of the economists surveyed said that a recession was definitely looming.
The recession is not the first one since the end of a recession in the United States. The recession that began at the end of the 1990-91 recession appears to have been relatively mild compared to many of the recent recessions.
Despite the lack of an outright recession, economists say the recession began on Wall Street with the collapse of the housing bubble, which was fueled largely by a speculative bubble in subprime mortgages.
The sharp rise in stock prices also led to a surge in consumer spending, the source of much of the economic expansion. The bursting of the housing bubble and the massive rise in stock prices have meant a sharp drop in consumer income and consumer spending, and a slow decline in aggregate demand. This has been reinforced by the huge jump in commodity prices and the decline in the value of non-farm business inventories, which have been held down by business bankruptcies.
The recession began in large part because of the collapse of the housing bubble and the sharp drop in home values and mortgage balances.
The collapse of the housing bubble
The housing bubble began to grow in earnest in 2005, fueled by a boom in subprime lending. Subprime loans are made by banks at higher rates of interest compared to loans made by banks at lower rates of interest to borrowers with lower credit scores.
The growth of subprime lending was in large part stimulated by a federal program that provided government home loans to borrowers with poor credit scores.
The problem with subprime loans is that they are often to borrowers whose credit records are already in tatters. These borrowers often went to the bank to obtain a loan, but if they had gone to a non-government mortgage