Sunday, July 20, 2008

The unsettling void of the U.S. economy

To calm markets, the government last weekend hurriedly put together a rescue package for Fannie and Freddie that, if used, could cost as much as $300 billion. The urgent need for a rescue--together with another round of billion-dollar write-offs on Wall Street--has unnerved economists and investors.

"I was a relative optimist, but I've certainly become more pessimistic," said Alan S. Blinder, an economist at Princeton, and a former vice chairman of the board of governors at the Federal Reserve. "The financial system looks substantially worse now than it did a month ago."

Mr. Blinder added, this is like the Great Depression. "We haven't seen this kind of travail in the financial markets since the 1930s," he said.

More than two years ago, Nouriel Roubini, an economist at the Stern School of Business at New York University, said that the housing bubble would give way to a financial crisis and a recession. He was widely dismissed as an attention-seeking Chicken Little. Now, Mr. Roubini says the worst is yet to come, because the account-squaring has so far been confined mostly to bad mortgages, leaving other areas remaining--credit cards, auto loans, corporate and municipal debt. “We're not even a third of the way there."

Where will the banks raise the huge sums needed to replenish the capital they have apparently lost? And what will happen if they cannot? The answers to these questions are unknown, an unsettling void that holds much of the economy at a standstill.

[Excerpt of an article by Peter S. Goodman, NY Times]

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