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What's Ahead For the Economy?

Expert predicts tough year in 2009, but improvement soon to follow

By Mark Huffman
ConsumerAffairs.com

October 29, 2008

Personal Finance • Staying Healthy in a Sick Economy • Consumer Confidence Sinks to Historic Low • How Retirees Can Survive the Bear Market • Are Men Hardwired to Overspend? • Shopping Poll Holds Bad News for Retailers • 533,000 Jobs Lost in November • Feds Report More Signs of Recession • Consumer Confidence Rebounds in November • Cheap Oil May Be Economic Stimulus • Job Security Lacking This Holiday Season • An Upside to the Down Market: A Lower Tax Bill • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession --- • More Personal Finance News

On the one hand, you still have the doomsayers, who predict the worst of the credit crunch is still ahead. On the other, you have the Dow's remarkable 889-point rally Tuesday.

Is it a time for pessimism or optimism? At least one expert says it's not as bad as the doomsayers make it out, but there will be no quick recovery like a one-day stock rally might suggest.

"In spite of the federal economic rescue package, economic and financial recovery will be sluggish and the unemployment rate will rise significantly into 2009," said Tom Simpson, Federal Reserve Board veteran and University of North Carolina Wilmington executive in residence.

"The global crisis has spread from mortgages to other parts of the financial system. The resulting credit crunch is curbing business and household spending, which could push the economy into a serious recession and compound the financial crisis. The conditions underlying this deepening crisis have not been faced since the early 1930s."

That last statement may sound ominous, but Simpson says there is a big difference between the era of the Great Depression and our current situation. Back then, the government sat on its hands, believing it was not wise to intervene in the market. Today, the U.S. Government has policies in place that are acting to short-circuit the current damage.

"Over the past year, federal authorities have taken unprecedented measures to counter these forces by introducing a series of new programs to replace lost liquidity and restore confidence in the financial system to avoid a repeat of anything resembling the 1930s," he said.

Simpson says the current crisis is largely due to lax mortgage lending standards earlier in this decade that contributed to the previous boom in the housing sector. Speculation that home prices would continue to increase and remedy bad investments and lending decisions also played a major role.

"As the housing market and home prices have plunged, losses on a vast array of mortgage-related securities have mounted at key financial institutions which has resulted in some notable failures and a 'seizing up' in financial markets. In response, there has been a major pull back of lending and other financing, which likely is pushing the economy into recession. Borrowers of all types are facing significant difficulties," he said.

Simpson believes the recently enacted rescue package and other initiatives should help to resume the flow of credit and stabilize financial markets, but that there will be setbacks along the way.

"The upcoming year will be a difficult one, but I believe that the financial markets will be restored and a severe recession will be avoided," he said.

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