Those of us who are old enough probably recall the disastrous financial crisis of 2008. Precipitated from a spike in debt defaults in the housing segment, brought on by what former Federal Reserve Bank Chairman Alan Greenspan famously coined as “Irrational Exuberance”. Excessive optimism in the prospects of the US housing Market led to a surge in subprime debt (subprime are low income, low credit worthy segments of the economy) which invariably led to a spate of massive defaults on debt obligations. The collapse of the housing market was the first domino in what was to be the greatest economic downturn in the history of the United States barring the great depression of the 30s. Next in tow, was the financial system, investment banks began to crumble in short order, Lehmann brothers, Fannie Mae, Freddie Mac just a few examples.
Unemployment was an inevitable new frontier for the debilitating assault of the economy’s sharp reversal, reaching all time highs of over 10%, from a pre crisis average below 6%. An economy in free fall and an expeditious hemorrhaging of jobs, incomes, and other economic amenities prompted a government intervention, which in a fiercely capitalist economy like the US, was in itself was a worrying indicator as to how acute the economic downturn was. This gave birth to TARP (Troubled Asset Relief Program), a special purpose vehicle designed by then Treasury Secretary Hank Paulsen, to, as the name suggests provide relief to the most highly and toxically indebted organizations e.g. AIG, Merrill Lynch, Chrysler Corp. among others. This stimulus package was highly controversial, because it raised the uncomfortable notion of “Too Big To Fail” corporations in the US, who , in spite of risky zero sum managerial styles, could not be left to the devices of the market and when faced with certain failure, were given national Hail Marys on tax payer monies. This provided testimony as to their unfathomable girth and vitality. The reality could not allow for lessons to be taught to risk taking managers, and as such ruthless pragmatism customarily had to prevail. The US government stepped in, shored up their debt, and these companies have lived to tell the tale, and some like Chrysler Corporation have since refunded the government monies that were availed to them during the crisis period.
It has been 6 years since, and the world is now asking the question whether the US has finally turned the corner and whether the worst is finally over. Whereas the unemployment figures are getting better, almost back to pre crisis levels, the US economy still remains vulnerable. Consumer Spending is crawling and income-wage growth is tepid at best. US economic indicators have been largely a mixed bag and that is what has obviated the continuation of the expansionary monetary policy of maintaining effective money market rates at zero, adopted by crisis period fed Chairman Ben Bernanke and now being pursued also in earnest by current fed boss Janet Yellen. All this was done in a bid to jumpstart lending in the economy, business investment (like hiring new workers), and by extension boost consumer spending. This move, it is believed will aid the Fed more conclusively in reaching their core objective of full employment in the economy.
Last month, new House sales grew at the fastest rate since 1992, but on the flip side the economy shrank by a mammoth 1% in the first quarter of 2014. That is the ambivalent nature of the US effort to claw its way back to economic prominence. Low rates are to be maintained for the medium to long term as the signals that the economy can withstand higher fed bank rates are not strong enough and according to some observers altogether absent.
All said, the US is not out of the woods quite yet, but is fairing comparatively better than her European Counterparts, save for Germany. The 2008 crisis was horrendous, but my feeling, is that the US is on the right track and has the capacity, to get back on its feet, and with it the global economy.
I Hope.
