Indeed, rationality says that there is some chance of a recession along with few questionable probabilities. And arguably there are certain clinical manifestations and diagnostic symptoms that points to a highly perceivable recession looming across the US and the Europe. Consider many circumstances. The economic state of affairs isn’t doing well with faltering economic recovery and job growth rate which has fallen bellow previous records. We are waiting for the NBER academic review of a probable recession as of late. They are doing this for the last eight decades ever since “Wesley Mitchell” started to analyze business cycles by around 1916 and he was the front runner of measuring business cycle timings as well of the term BRICS-about 80 years ago (Jeffrey Sachs actually didn’t invented the term BRICS- he rather innovated Mitchell’s concept!). What a great foreseer who foresaw nearly 100 years ahead of his business days!
Coming “directly to the point” and without inventing parables, I would say, one of the prime real indicators of a probable modern economic recession is perhaps and without doubt- the stagnating FFR, or the Federal Funds Rate. This unique yet powerful Federal Reserve instrument (interest rate) after declining for more than a couple of years since 2008 isn’t moving upwards at all. And here lay the hidden problem!
The FFR rate should have moved by April or say, June by most this year (2011), which it did not! And I was alarmed by the fact that if this trend continues for another 2-3 months more, it can profoundly spell a rebound recessive doom for the OECD economies. And that’s what it is technically lingering right now!
Some interesting connotations;
The FFR touched a formidable low at 1% on June 29th 2004, at the peak of the great credit boom, when, the then Fed governor Mr. Greenspan kept the policy rate indicatively low during the period of 2002-2003. This ultralow rate scenario fuelled credit boom, we all know that. Well, it was a causal effect to cushion the economy from the dotcom bubble burst of 2000. Indeed, that helped revive the American market economy from the aftermath of the first millennium crash (dotcom). The FFR started its journey high up in the air from August 9th 2004, when it was increased by 0.25% bps. Symbolically, the FFR peaked incrementally to 5.25% at the mid of September 17th, 2007 say, when Mr. Bernanke took over as Fed Chairman just a year before from Mr. Greenspan. It’s quite interesting to note that the FFR rate also peaked to 9% during 1987-1988. Questions arise of whether this high FFR rate did actually precipitate the 1987 market crash, since, there are no other potential predisposing factors being found yet, and I “can’t” answer that (which is beyond my cognizance).
If that’s so, then it’s the rate hike which peaked (5.25%) during the September 2007 and this was “the time” when markets globally started to become volatile, and write-downs and default news circulated throughout the USA.
Speaking in the “wind” won’t do any good, so one requires backing up with some clear facts.
And the fact is; it’s time for some “reality show” in economics!
My question is-
Who’s the “d.g” who moved the rate and messed up things? Why did they take that bold decision to raise the interest rate and that too, based on what rationality? Or was it inevitable and beyond human control? Why it went up so much and now why is it stagnating? Who’s gonna answer?
Now, it’s exactly four years from today, when the rate peaked, as well, exactly 3 years since the Lehman Bros went bust on September 13th. What a strange coincidence!
Nevertheless, those ensuing rate increases set-off uncompromising adjustments in amortization schedules of subprime loans extended on lax documentations to less creditworthy individuals, who found it comparatively difficult to pay back the installments as well as the interest payments all due to intricacies in Adjustable Rate Mortgages (ARM) settings, a common story with which we all are familiar.
You may find more about these from a beautiful paper written by Gary Gorton from the NBER in 2008.
The “crux” of the matter is however, to pin down on the main culprit-here, the FFR rate or “the d..” and some evidence I have provided that might be of some interest to the readers, just to tag the main villain-Federal Fund Market Rate. And that isn’t moving; since there is no ensuing inflation target and if this particular trend goes through October this year, I may well assume that there is a “sure shot” recession in the line. Comparably better, Euro zone is at least experiencing some dynamicity in its ECB policy rates (due to some inflation targeting).
This is the reason I am rhetorically shouting as an inflation hawk, to see some real dynamicity in the FFR rate. That would do just good enough to stall a double-dip recession, from my viewpoint.
The rest is-well, Mr. Bernanke knows.
The inherent risk of raising it too quickly yet again may result in counter-calamity similar to one above. What a dreadful trap it is- and where is the way out?
President Obama has a trademark answer. His oratory proposal of including an expansion of a cut in payroll taxes- and the much awaited mission on new spending on public works carving out $447 bn through 2012 may help infuse some “life” in the FFR rate and the economy. Well, only if it goes through in full part and parcel!
Else, there’s every possibility that a recession is too near at hand. There’s nothing to get bunged up however. And even if you don’t really need a PhD to buck up those things like business cycles, neither it requires you to be a financial geek. It’s that simple as ups and downs in our life cycle.
This is business cycle. Good old stories retold in new flavors. It’s gonna get moving as life goes on...they are looking at it, kid.
Sources: NY Times.
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