Is the US Economy in Recession?
The Subprime Crisis May Be Forcing The US Into Recession
Investment analysts at Morgan Stanley say the US economy is in recession, while analysts at Goldman Sachs warns such a downturn is now likely.
Is the US economy in recession? In January 2008, the US Federal Reserve slashed interest rates from 4.25% to 3.5% – the biggest overnight cut in more than 25 years. Investment analysts stated the move was an act of “obvious panic” after the previous day’s global stock market slump. All of this was spurred by the subprime crisis and the billions of dollars lost in the credit markets.
Over the course of the previous day (when the US was on holiday), stock markets across Asia and Europe plummeted, with the FTSE 100 losing the most in a single day since the terrorist attacks of 9/11. The global declines also came after George Bush’s attempt to inject $145 billion into the US economy to stave off a recession.
The Subprime Crisis
The threat of economic recession has been centred on the massive slump in the US subprime housing market over the last year. While mortgage rates were rising, home loan defaults and repossessions hit record levels, predominantly in the subprime sector.
The US subprime crisis is a term used to describe high risk loans, offered to people with poor credit histories and who are more likely to default on their repayments. The subprime sector hit a crisis point when house values declined, leaving massive levels of unpaid credit to be accounted for.
The Global Credit Crunch
It was not just mortgage providers that were left out of pocket. A lot of the subprime debt was repackaged into complex investment products, and sold on to other banks and investors all over the world. When these investments collapsed, it had a host of knock-on effects on the world credit markets.
Today, the cost of obtaining credit is much higher because of the higher risk of default. Business and personal loan applicants will face intense scrutiny and costly repayment plans.
Is The US Economy In Recession?
Prior to the latest stock market slump, analysts at the investment bank Morgan Stanley released a report entitled “Recession Coming”, which detailed how the credit crunch had started to inflict serious damage on US companies. “Slipping sales and tightening credit are pushing companies into liquidation mode,” the report said.
It also highlighted that LIBOR spreads (the rate at which banks lend money to each other) had rocketed, and that the declining job market could now be buckling. When the markets were seemingly calm, the bank pointed out that consumers potentially faced a perfect storm.
And now that storm has started to hit. Fellow investment banks Goldman Sachs and Lehman Brothers agree that Asia and Europe can no longer come to the rescue. The whole world is feeling the impact of the US subprime crisis and the credit crunch. Analysts believe that the Federal Reserve will have to cut interest rates down to as little as 1% by the end of the year, in order the curb the impact of this credit crunch nightmare.
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