Tuesday, November 4, 2008

Financial Crisis & Recession

In case you're wondering about the roots of the current financial crisis, here's a summary by Professor Simon Johnson from his testimony before the Joint Economic Committee of Congress on October 30, 2008.

"In the United States, we have been aware of an impending economic slowdown for over a year. We will never know how pronounced the slowdown would have been in the absence of the acute credit crisis that began in mid-September. That crisis has triggered an ever-expanding series of impacts on the global economy that have almost certainly plunged our economy into a serious recession. The constriction in the availability of credit itself has a real impact on spending and investment by consumers and businesses. The widespread fear generated by events over the past six weeks has had an additional chilling effect on consumer and business confidence. The financial crisis has triggered severe economic problems in emerging markets, which have spilled back into the economies of some of our most important trading partners. Some prominent economists are raising warnings that de-leveraging in the "shadow banking system," such as by hedge funds, could trigger another wave of asset price falls across global markets.

"I am not saying that the sky is falling on the US economy. As of now, most forecasts indicate that we will experience a serious recession, perhaps comparable to the recession of the early 1980s, but nothing like the Great Depression. However, I want to underline the point that most of the most pedigreed economists and policy makers have failed to anticipate the serial effects that the crisis has had, and that it may yet have more surprises for us."

Professor Johnson goes on to give his views on the need for an economic stimulus. A breakdown of the summary can be found in his testimony.

Click here for a link to another of his articles: Recession for Beginners.

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