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Rate cuts raise bigger concerns
Six central banks slashed interest rates Wednesday in the first coordinated rate cuts since the 2001 recession, signaling they think the U.S. and world economies are in danger of imploding from rapidly deflating bubbles in real estate, credit, commodities and some stock markets.
But in a move that could set off more turmoil in already shattered stock markets Thursday, the Securities and Exchange Commission let a ban on short-selling of nearly 1,000 financial stocks expire at midnight - allowing investors once again to profit from bets that the stocks will fall.
And at the White House, officials were examining requests from Massachusetts, Alabama and California for emergency loans to get them through an acute credit crisis that has frozen them out of short-term borrowing markets.
Governments seem to be taking more extraordinary and unprecedented steps each day as the dangers to the economy have grown. The U.S. economy had been sinking slowly into recession since the beginning of the year, but its slide accelerated with each frantic event in the past month in a way that has left even the most conservative forecasters sure of recession and fretful about the future.
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the International Monetary Fund said Wednesday in an annual economic report that in past years has provided bland forecasts for another year of steady growth.
The IMF dramatically lowered its world growth estimates and heralded the first trans-Atlantic interest rate cuts since the September 2001 terrorist attacks as the right medicine to prevent the worst from happening - a worldwide market and economic collapse like the one during the 1930s.
“If the right policies are in place, then the probability of a ‘Great Depression’ is extremely small,” said the IMF’s chief economist, Olivier Blanchard. But he added that more work is needed in Europe in particular in order to deal with the crisis in a more cohesive way to reduce the risk of depression to “nearly nil.”
The way that even the most stodgy forecasters have dispensed with using the once-taboo “R” word and are now using the “D” word to describe the threat to the economy is another sign of how dark the outlook has grown.
Another usually optimistic forecaster, the Conference Board in New York, said it expects the United States to be in a yearlong recession that started this summer, with a risk of further deterioration if the Treasury’s and Federal Reserve’s strenuous efforts to resuscitate frozen credit markets don’t work.
“We see no sign of improvement in the housing market before the first half of 2009 at the earliest, and housing prices may drop further - at significant cost to consumer spending over the next two quarters, holiday season or none,” said Bart van Ark, chief economist of the business association.
“The rest of the world - particularly Europe - is being buffeted by the current storm, too, and even Asian economies are now seeing some slowdown in growth,” he noted, with the Bank of China joining U.S. and European banks in cutting rates Wednesday.
“That will affect U.S. exports, which have been a major engine of U.S. growth over the past half-year,” he said.
Joachim Fels, economist at Morgan Stanley, said “the Depression risk is reduced” because of the rate cuts and other moves by central banks this week, but “we still believe that we are heading into a global recession.
He said the Fed’s and the Treasury’s efforts to unclog credit markets with numerous innovative loan programs since March may be just as important as the rate cuts to reviving economic growth.
“Policymakers seem willing to do whatever it takes,” he said. “The battle may not be won yet,” but eventually the markets and the economy will respond to the Fed’s ministrations.
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