Tuesday, November 27, 2007

Wall Street Bets on an Impending Recession

I came across this Washington Post story (http://www.washingtonpost.com/wp-dyn/content/article/2007/11/26/AR2007112602206.html) after I had done the previous post on the Citigroup job cuts. I guess it is nice to have validation that I am not the only one thinking that a rough ride is ahead for the economy. I still believe that unless something changes quickly to revive the housing market, the recession could be fairly severe.
Of course, the story does not go into how things got to their current status: a largely unregulated mortgage industry that allowed loans to be made to those who should never have been approved for them and on terms that only made sense if housing prices continued to sky rocket. I have yet to see any industry properly regulate itself when quick money is to be made with any downside being left for others to pick up. Perhaps the formerly GOP controled Congress should have worried more about the economy and what was happening in the residential mortgage industry that about what was going on in people's bedrooms. I suspect most rational voters [obviously the worse Christianist wingnuts are not rational] are going to care more about a severe recession than the Federal Marriage Amendment. Here are some story highlights:
Wall Street is betting on a recession. Investors in stocks and bonds are paying prices that indicate they believe a snowballing housing crisis and worsening credit crunch will soon tip the U.S. economy into a recession, analysts said. Many economists, including leaders of the Federal Reserve, don't think things will get that bad, but some say the risk of a serious downturn has risen in recent weeks.
In a view increasingly typical among Wall Street economists, analysts at Merrill Lynch published a research note yesterday with the headline: "We believe we are going to see a recession in '08." Widespread expectations of a recession could be self-fulfilling because of how financial markets and mainstream America are interconnected. If investors are sufficiently convinced a recession is ahead, they would be reluctant to lend money to businesses that want to expand, making it so.
Higher interest rates for risky mortgages, for example, could make it difficult for would-be buyers to afford a home, which could cause prices to drop further. That, in turn, could spur more foreclosures, which could lead financial institutions to further increase rates they charge on mortgages. "These things feed off of each other," Wyss [chief economist of Standard & Poor's] said.
The potential freeze in bank lending could mirror the savings and loan crisis of the early 1990s, a major cause of the 1990-91 recession. "In any recession, you get to a tipping point where sentiment unravels and feeds on itself. Psychology takes over," said Mark Zandi, chief economist of Moody's Economy.com.

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