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Federal Reserve Veteran: 2009 Economic Recovery Will Be Sluggish, Unemployment Will Rise

Newswise - "In spite of the federal economic rescue package, economic and financial recovery will be sluggish and the unemployment rate will rise significantly into 2009," said Tom Simpson, Federal Reserve Board veteran and University of North Carolina Wilmington executive in residence.

"The global crisis has spread from mortgages to other parts of the financial system. The resulting credit crunch is curbing business and household spending, which could push the economy into a serious recession and compound the financial crisis. The conditions underlying this deepening crisis have not been faced since the early 1930s."

According to Simpson, the difference between the era of the Great Depression and our current situation is that the United States now has policies that are acting to short-circuit the current damage. He noted, "Over the past year, federal authorities have taken unprecedented measures to counter these forces by introducing a series of new programs to replace lost liquidity and restore confidence in the financial system to avoid a repeat of anything resembling the 1930s."

Simpson noted that our current crisis is largely due to lax mortgage lending standards earlier in this decade that contributed to the previous boom in the housing sector. Speculation that home prices would continue to increase and remedy bad investments and lending decisions also played a major role.

"As the housing market and home prices have plunged, losses on a vast array of mortgage-related securities have mounted at key financial institutions which has resulted in some notable failures and a 'seizing up' in financial markets. In response, there has been a major pull back of lending and other financing, which likely is pushing the economy into recession. Borrowers of all types are facing significant difficulties." he said.

"The recently enacted rescue package and other initiatives should help to resume the flow of credit and stabilize financial markets, but there will be setbacks. The upcoming year will be a difficult one, but I believe that the financial markets will be restored and a severe recession will be avoided."

 

Source: University of North Carolina Wilmington