It took the Bush administration over a year to admit that the United States (US) is in a recession. The rest of us have known it long before that. There were indications as long as three years ago about where the U.S. and the world was heading financially. The question is where do we go from here? So far, the “bailouts” have done little to restore the consumer confidence that is necessary to restart the economy.No one seems to have the answer.
Factors that are effecting the downturn include:
There are at least five factors that are causing the downturn:
- Automobile market–The money being given to American automobile makers is being looked at as going down a “rat hole” because these companies have been losing money for years. Even though companies like Honda and Toyota are also experiencing a slow down in sales, it does not compare to what has been happening to General Motors, Ford, and Chrysler.
- Banking problems–although the the financial institutions now have money from the “bailout”, they are not quick to lend it out, even to those with high credit ratings.
- Consumer reaction–there is a sense of anger and frustration among the population, a high percentage of them that did not approve of the “bailout”, feeling it should have gone directly to those needing help staying in their homes. As competition for jobs, especially among minorities, increases it could manifest itself in mob violence.
- Investment contraction–investors who are willing to buy U.S. Treasury Bills with a return of less than 1% are an indication of the fears people feel about investing money in the business or the stock market.
- Real Estate market–home prices are still falling and more foreclosures are taking place almost daily.The market has already lost over $5 trillion in value and is still dropping.
The Lean Years Ahead
According to Yale economist Robert Shiller, the years ahead are going to be very lean. He thinks that a more conservative banking culture will emerge. In regard to the “bailout”, it may help the banks but will do nothing to provide a stimulus for consumption and the economy. Shiller expects a protracted slowdown, with a sharp contraction of consumer spending and the willingness of business to invest. With the collapse in confidence associated with current events, the worst of the crisis is yet to come. (Spiegel Online, 10/7/08)
Although U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are now trying to bring the crisis under control, it appears to be too little, too late. The incoming administration may be facing the first economic depression since the 1930’s.