Lawrence Summers (a very famous economist who seems to have a problem with arrogance) writes:
>Over the past 20 years major financial disruptions have taken place roughly every three years, starting with the 1987 stock market crash; the Savings & Loans collapse and credit crunch of the early 1990s; the 1994 Mexican crisis; the Asian financial crises of 1997 with the Russian and Long-Term Capital Management events of 1998; the bursting of the technology bubble in 2000; the potential disruptions of the payments system after the events of September 11 2001 and the deflationary scare in the credit markets in 2002 after the collapse of Enron.<
... and now we see the housing/credit crunch.
But where's the next financial "disruption" going to hit? Suppose that the Fed reduces rates and eases credit further either (1) to prevent the spread of the financial mess to the rest of the economy or (2) to moderate the recession that hits when the financial mess does spread. Suppose further that the Fed succeeds, so that all the US sees is a mild recession of the sort seen in 2001. (Of course, as wotj that one, it's likely to be less "mild" for those of us who have to find jobs in labor markets.)
So a "soft landing" is achieved (even though that phrase should make our backbones go into
But in the previous financial crunches that Summers mentions, the Fed's response simply caused a delayed reaction in other sectors. For example, the Fed's response to the "Asian financial crises of 1997 with the Russian and Long-Term Capital Management events of 1998" helped to cause the "the technology bubble" which burst in 2000. Then the 2001 "save" sparked the housing bubble that's currently pulling the U.S. economy down.
So what sector is most likely to be hit if the Fed succeeds now?
My crystal ball is on the fritz, so I'm stopping there. And this is not a rhetorical question.