Monday, November 12, 2007

$100 Oil May Mean Recession as U.S. Economy Hits `Danger Zone'

The financial news just seems to be getting increasingly sour. is reporting that oil prices are setting the stage for even more bad news (, particularly if other economic shocks occur. Here are brief highlights:

Nov. 12 (Bloomberg) -- Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession. `We are in a danger zone,'' says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. ``It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.'' Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable as well, after the U.S. subprime-mortgage collapse contaminated their credit markets.
The world economy may still dodge recession as emerging markets continue to expand. A report last week by Deutsche Bank AG said gains in energy efficiency mean the effect of more expensive oil will ``remain muted.'' Even so, gloom is spreading at a speed that suggests ``we're walking a really fine line,'' says John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``Even a month ago, you probably wouldn't have thought we'd be seeing a sustained credit problem and oil holding up above $85 a barrel.''
Meanwhile, the New York Times is reporting that the deal structured last week to prop up subprime loan investment securities probably will not work (
When the country’s three largest banks reached agreement on Friday on how to structure a $75 billion fund to prop up distressed securities, an exhausted group of its top planners gathered in a Bank of America conference room to toast their success with 12-packs of Bud Light. But the big question is: Will it actually help? The answer, some analysts and big investors say, is probably not much.
The backup fund will not save troubled structured investment vehicles, or SIVs, that hold billions of dollars in packaged loans, though it could delay their demise. It may help calm the turbulent credit markets by preventing a sharp sell-off of securities, though analysts say the fund will probably not be able to offset the deteriorating prices of the securities.
The backup fund will not purchase the most distressed assets in the SIVs. Bank organizers agreed that it would not accept any subprime mortgage-related assets and only certain types of risky complex instruments like collateralized debt obligations. But the criteria means that SIVs, or the banks that sponsor them, will be left holding their most battered securities or worse — they may be forced to sell them at fire-sale prices.

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