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The U.S. Recession Will Be Painful – But it Could’ve Been Lots Worse |
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By Martin Hutchinson
Contributing Editor
Money Morning
The U.S. economy is entering a recession. With each day that passes and each indicator we see, that eventuality becomes more and more clear.
Even so, we can take some real comfort in knowing that we’re likely going to avoid the “bottomless pit” of a Great Depression II. A substantial recession with accompanying inflation – roughly along the lines of the downturns of 1974 and 1980-82 – seems the most likely scenario we face.
The last two U.S. recessions – the 1990-91 downturn touched off by Saddam Hussein’s invasion of Kuwait and the subsequent recession in 2001 – were both short and shallow, and perhaps even unnaturally so. Gross domestic product (GDP) declined by about 1.5%, peak-to-trough, in the first case, and a mere 0.5% in the second.
In 1990-91, the tax cuts and other structural changes made by President Ronald W. Reagan had increased the trend growth rate of the U.S. economy, so only the artificial drag of the savings-and-loan crisis brought a modest recession. In 2001, the U.S. Federal Reserve was expanding the money supply so rapidly, and dropping interest rates so far below the level of inflation, that what might have been a substantial downturn after the 1996-2000 stock market bubble was turned into renewed recovery led by the housing sector.
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Inside the Credit Crisis: How the Fed’s Efforts to Lower the Fed Funds Rate May Leave it Powerless to Stop the Financial Meltdown |
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By Shah Gilani
Contributing Editor
Money Morning
“The truth? You can’t handle the truth.”
The truth is, the U.S. Federal Reserve does not directly control the Federal Funds rate, and its efforts to reduce the benchmark rate from 2.0% to 1.5% may do more damage than good – though for reasons you’d never guess. Attempts to lower the Fed Funds rate could irreparably damage Fed credibility and may actually narrow the Fed’s credit-crisis-management options.
The Fed Funds rate is the interest rate that banks charge one another for overnight loans. Under normal circumstances, the Fed Funds rate is the central bank’s primary and most effective tool in influencing interest rates. But the current market situation is anything but normal.
Contrary to what most people think, the Fed Funds rate is a “target;” it is not an absolute number that anyone actually has to follow. The central bank’s policymaking arm, the Federal Open Market Committee (FOMC), resulting principally from its deliberations on the outlook for inflation, and secondarily the general state of the economy, raises and lowers interest rates throughout the financial system and the economy by targeting the Fed Funds rate.
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Heads I Win, Tails You Lose: Why the Senate Bailout Bill Will Fail Taxpayers |
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By Shah Gilani
Contributing Editor
Money Morning
My sister lives in a landmark building in Coral Gables, Fla. There was a fire in one apartment in the building. After that fire was brought under control, the fire department - for some unknown reason - dropped a hose in the burned apartment, and left the water running … for hours.
That inane maneuver destroyed many apartments, crippled the building’s infrastructure and resulted in the building being temporarily condemned. The entire building was closed down for many months. Every person who lived there had to relocate. My sister, fortunately, had the wherewithal to take up temporary residence in the world-famous Biltmore Hotel.
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