Some start to warn that the erosion in the housing market could undermine economy
Recession! It's not yet a consensus of the crowd of economists that forecast the US economy, but gloom is spreading. And economists have no magic wand to wave to stop an economic downturn.
"A sharp decline in house prices and the related fall in home building … could lead to an economy-wide recession," warned Martin Feldstein, one of the official arbiters of US recessions and expansions, at a Jackson Hole, Wyo., conference of the Federal Reserve of Kansas City, Mo., on Sept. 1.
At that same conference was Ben Bernanke, Fed chairman. On Sept. 18, Mr. Bernanke is expected to lead the central bank's policymakers into a cut in interest rates that might, or might not, keep that warning from coming true. Wall Street is waiting to see if the Federal Funds rate – the interest on loans that commercial banks, in effect, make to one another – will be trimmed one-quarter percentage point to 5 percent, or cut by half a percent, or even more.
Dr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, suggested a 1 percentage point drop. But he didn't specify how fast this should occur. The Fed has in recent years usually shifted monetary policy gradually.
As to concern that such a rate decline might lead to a stronger economy and higher inflation, Feldstein reckoned such an unwelcome inflationary outcome would be "the lesser of two evils." The other evil would be a deeper economic slump.
The status of the US economy is of world concern. When Chairman Bernanke was in Berlin last week to deliver a nonnewsy talk to a German central bank conference, he met with Chancellor Angela Merkel to discuss the American mortgage market crisis. Some important German state banks, seeking a higher interest rate, bought shaky financial instruments based on sub-prime mortgages and are now in trouble.
Up to now, though, most American economists see a sluggish economy this year and next, but not a recession. Members of the National Association of Business Economists, surveyed before the bad news on jobs for August, figure that growth of the gross domestic product (the nation's output of goods and services) will be a modest 2 percent after inflation this year.