The Financial Crisis: Bad and Getting Worse, but Put Away that D-word Turn this in to a Cash Machine Using our Asset Finders Program.
It began as the "subprime crisis" in 2007, and then mushroomed into a full-blown global recession in 2008. And still, despite mammoth government intervention, the bad news keeps getting worse. Are we now teetering on a precipice, ready to plunge into another Great Depression? Can the latest proposals pull the economy out of its nosedive?
There is plenty to worry about. But while many experts say this crisis is the worst since the Depression, that does not mean it will be as bad.
Unemployment and other economic gauges will continue to worsen, but unless governments make a major misstep, like igniting a worldwide trade war, economies should stabilize and recover on a "very flat path" that could take several years.
Japan went through a similar bank crisis in the 1990s without tumbling into a full-blown depression, "Given that we're reacting faster than Japan, I think you can make a good inference that [a depression is] not going to happen here.
Many estimates call for gross domestic product in the U.S. to shrink by 2.6% in the first quarter of 2009, note. That's bad, but small compared to the 27% decline from 1929 through 1933. A depression is generally defined as a drop of 10% or more.
Still, there is more bad news than good, and the depth of the problem can be measured by the lack of consensus on what to do about it. Consider this gloomy observation in a January 20 Wall Street Journal story about the British government's abrupt decision to pump billions more into what the writer called the country's "flagging" financial-rescue plan: "Governments on both sides of the Atlantic are struggling to keep up with the deepening economic crisis -- and may be running out of ammunition to battle it."
In the U.S., banks continue to withhold loans despite huge infusions of government cash, and Goldman Sachs estimates that financial institutions will lose $2 trillion on loans, with only half of that realized to date. Banks are even starting to call in loans to borrowers, such as home builders, who have made all their debt payments on time. Troubles are now expanding to commercial real estate firms. The numbers of layoffs, bankruptcies and foreclosures are growing. Household names, such as Circuit City electronics stores, are closing their doors, and problems have worsened at Citigroup and Bank of America despite government help.
There is little consensus on how to remedy the problem. Indeed, the U.S. government is again considering buying up toxic assets held by financial firms, a plan adopted last fall and then immediately scrapped in favor of direct cash infusions to banks.
The tale of woe and confusion is much the same around the world. The economic slowdown is so steep as to cause oil prices to drop to around $40 a barrel, from more than $140 last summer. Trade is so sluggish that shipping rates have plunged to astonishing lows. The European Commission warned on January 20 that the 27 nations of the European Union are likely to experience a "deep and protracted recession."
At the request of then President-elect Barack Obama, the Senate on January 15 voted to release the second half of the $700 billion Troubled Asset Relief Program. (No action by the House is required.) Comments from Obama administration officials suggest much of this $350 billion may be used to buy "bad assets" held by financial institutions. Those include mortgage-backed securities and other holdings that have plunged in value and become all but untradeable. Getting these assets off the financial institutions' books was at the heart of the TARP program when it was proposed in September by Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke.
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