Larry Summers on Recession

Posted by: Michael Mandel on November 27

Writing in the Financial Times a couple of days ago, Larry Summers warns of recession:

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

He then goes on to say:

There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

We do not have comparable experiences on which to base predictions about what this will mean for the overall economy, but it is hard to believe declines of anything like this magnitude will not lead to a dramatic slowing in the consumer spending that has driven the economy in recent years.

and

Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.


Larry is a sober kind of guy. He would not be warning of recessions this way unless he was really worried.

I do think, though, the big question is whether this is an economyw-wide slowdown or focused mainly on the consumer.

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Reader Comments

Brandon W

November 28, 2007 12:21 PM

Those operating in the Capitalist economy will do fine as long as the central planners - er, bankers - ensure that the world is awash in cash. They will have the cash to continue buying luxury goods, continue investing in growing international markets (there will always be growing markets SOMEWHERE), and buy up real estate cheaply as people become unable to afford ownership of it. Most of the country, however, are not Capitalists; they are "Consumerists". They have no capital to invest, no real income from assets, and thus exist within an economy of consumption.

--They're going to get nailed to the wall.--

But the advantage is that more ownership of real estate and assets will flow into the hands of the capable, and out of the hands of those incapable of being genuinely productive.

Kartik

November 28, 2007 01:08 PM

A recession is when wealth returns to its rightful owners.

PATRICK MCEVOY

December 8, 2007 07:49 AM

1.) LARGEST EXPANSION IN HISTORY:DOUBLE OF PROJECTIONS.
2.)EVERYBODY IS WORKING.(CHOICE)
3.)WE ALL HAVE HOMES(C).
4.)WE CAUGHT THE ROUGES,AND HAMMERED THEM:USSR IRAQ IRAN N.KOREA. wHY DON'T I HEAR ABOUT THE CHEAP OIL GOING TO FRANCE, GERMANY, RUSSIA $22. A BARREL TO BE PROTECTED ON THE SECURITY COUNCIL. BY THE WAY WE HAVE LARGE BASES IN THE MOST EXPLOSIVE REGION THERE FOR OUR NEXT GENERATION(S).
5) WE ALL HAVE A GREAT STANDARD OF LIVING AND HEALTH CARE(CHOICE)
5.)EVERYBODY IS NOW COMPLAINING. WE LIVE IN A GREAT COUNTRY WAKE UP!

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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