Robert Reich argues that the US needs to see more government spending to get it out of this quagmire. The problem, as he sees it, is not the lack of credit. Rather, the problem lies with the lack of demand. Click here to read his assesment of it all: The Mini Depression and the Maximum-Strength Remedy.
Robert Reich is the nation’s 22nd Secretary of Labor and a professor at the University of California at Berkeley. His latest book is “Supercapitalism.”
The US sub-prime mess, festering since over a year ago, finally crumbled like a deck of cards over the last few months. It quickly degenerated into a global financial crisis. The US Fed stepped in with ad hoc rescues of Bear Stearns, Fannie Mae, Freddie Mac, AIG. Lehman was the sacrificial lamb. WaMu and Wachovia collapsed due to exposures to the dubious debt. Many others were facing the same fate. In a couple of months, credit completely disappeared as worries over counterparty risk increased. The contagion quickly spread over the Atlantic hitting the UK, and Europe began their own individual bailout and/or defensive plans. Unfortunately for Iceland, it was too late and it fell apart. Commodity prices sank. Global stock markets plunged. TED Spreads were double, even triple, what they normally have been. Confidence in the financial system was completely destroyed.
The collective expectation was that the Troubled Asset Relief Program (TARP), or better known as the US$700 billion bailout plan, would bring relief to the financial system and resucitate credit flows. That did not happen immediately. Credit is still very tight. Practically no one is lending to anyone. The TED Spread hovered around 4.5. Concerns about global economic growth took a turn for the worse, and today it is being reported that nearly 75% of people in the US already thinks the country is in a recession. The TARP was finally passed in early October, but the crux of the problem – housing prices – have not been tackled yet.
The media is now asking who is at fault. The banks for willy-nilly giving out loans to everyone? The credit rating agencies? Securitization of mortgages? Missing regulatory framework? Greed? The Fed? Well, today former Fed Chairman Alan Greenspan has spoken and said he may have “made a mistake” – that he may have missed the warning signs and the his stance on deregulation may have been off the mark.
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NYU’s ‘Dr. Doom,’ Nouriel Roubini, says U.S. recession could last 18-24 months
