Share this story
Close X
Switch to Desktop Site

How deep a recession?

Next Previous

Page 2 of 4

About these ads

"The standard recession [in the past] was caused by the Fed raising interest rates to slow inflation," says Dean Baker, an economist at the liberal Center for Economic and Policy Research in Washington. Today, "the basic story is that it's hard to recover from a recession that's caused by a collapsing bubble."

He says that 2001 is the only other time since World War II that the collapse of an asset-price bubble played the leading role in a recession. In that case it was the stock market, especially shares of Internet-related firms.

A great deal of stock-market wealth was wiped out back then, but the recent housing bubble is dealing a harder blow to the whole economy, shaking the foundations of the banking system and affecting the pocketbooks of more consumers.

In many past recessions, consumers retrench because of inflation, high interest rates, or rising unemployment. But many past recessions followed a "v" shape, with a recovery that was swift as consumers unleashed pent-up demand for goods and businesses hired people again.

This time, although the Fed has cut short-term interest rates as it usually does, economists worry not only about how deep the recession will be but how slow a recovery may be.

Even in 2001, with a smaller shock to the economy, "we kept losing jobs long after the recession ended," Mr. Baker says. While often called a mild slump, "it was actually a very severe recession."

Faced with the prospect of another "jobless recovery," many economists today are calling for a significant new government stimulus package. The financial system bailout effort, including a rescue fund that may reach $700 billion in size, is designed to prevent a 1932-style meltdown of the banking system.

Next Previous

Page 2 of 4

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.