Economists Talk Credit Crunch Five Months Later

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Five months ago, economists at the American Enterprise Institute met to issue a prognosis on the economy. On October 2, they met again to review their predictions, with newer data and fresh circumstances to consider.

“It is noteworthy that the sideways motion of the economy I predicted has occurred over the past several months. The economy has been remarkably resilient and has so far weathered the credit crunch quite nicely. The U.S may have entered a recession already, but even if it has, so far it is a mild one,” Charles Calomiris said.

He argued that it is also noteworthy that banks have raised much more capital, more than $40 billion this month alone, partly in stabilizing weak banks, and said continued growth in lending by commercial banks is a sharp contrast to the 1930s or 1980s.

“Most importantly, policy makers provided liquidity, and more than liquidity, to shore up banks. Whatever one thinks of those actions, one thing is clear: Most of the prior looming risk that significant financial institutions might fail has been resolved one way or another. Weak large banks are pretty much gone,” he said.

Calomiris said the concentration of the risk loan losses in the few remaining big banks gives us a much more accurate picture of the distribution of loan losses among Goldman, Morgan, JP Morgan, Citi, and Bank of America. He warned that house prices, consumption and investment will continue to decline over the next several months, and that the recession will assume a global character.

“But so long as credit markets stabilize, there is still reason to believe that the recession probably will not be too bad,” he said.

Peter Wallison hedged that: “One thing the last 18 months has shown is that we don’t have a very good idea of the linkages between the real economy and the financial markets. The financial markets are in a state not seen since the Great Depression, but the economy as a whole is certainly not in anything like that condition, and hasn’t been for the 18 months that the financial markets have been in unprecedented turmoil. I don’t think most economists would have thought it was possible that the financial markets could be at this level of distress without causing a serious recession, at the very least.”

Jesse Masai is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.