September 12, 2011 Patrick Oliver-Kelley

After the absurd fiscal brinkmanship of the Congress in the debt ceiling debate, the economy will continue to be sluggish and fragile. The thoughtlessness of the debt debate resolved nothing. The 2008 recession was worse than estimated; the present recovery is weaker than hoped. The psyche of business and consumers is timorous. The fear is that this is enough to drag the economy into a recession. Only the Fed can help with another round of fiscal easing. The fact that the US dollar is a reserve currency is the only reason it will not decline significantly, but decline it will.

I think one underappreciated factor is the difficulty buyers are having in taking advantage of those rates. Anecdotally, at least, it remains extremely difficult to get a loan, even for well-qualified borrowers. Banks are no doubt gun-shy given their weaknesses and recent experience, but an increased regulatory burden also seems to be an issue.

It seems a bit daft to call for a loosening in mortgage lending rules just 5 years after the end of one America’s great housing bubbles. And yet it is possible that regulations have been overdone or poorly crafted, leading to unnecessarily difficult lending conditions. Given the present economic situation, that’s a problem.


Companies are motivated to minimize costs, to save and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.

Now, in the current financial crisis, consumers, in addition to having less money to spend, want to minimize costs, to save and stockpile cash, magnifying the effect of less money flowing back to companies.


Bond markets never take a holiday. Though the pressure has eased on the recent headlines economies of Greece, Portugal and Ireland, strains appear in the far bigger economies of Italy and of Spain. The EFSF could expand to at least one trillion Euros or issue joint and several underwritten Eurobonds from several sovereign borrowers would be a good alternative. But Europe seems in no rush to do anything.

Alas, all is not well in Europe. The big question continues to be: can European economies manage their aggressive austerity plans against a backdrop of lagging growth? And the growth outlook is darkening. What’s worse, the euro-zone economy as a whole is rapidly losing momentum. Industrial production across the euro area fell by 0.7% from May to June. Production dropped in every large euro-zone economy, including a 1.7% decline in France and a 0.8% dip in Germany, which is widely considered the currency area’s bulwark against a return to recession.

One thing is for sure: a return to euro-zone recession would set the stage for a prolonged crisis environment.

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