- The Washington Times - Wednesday, April 8, 2009

The United States is experiencing “the greatest financial crisis since the Great Depression,” Simon Johnson, former chief economist for the International Monetary Fund, said Tuesday.

He projected that economic recovery will be sluggish, perhaps imitating Japan's experience during the 1990s except on a global scale. And while he did not mention the word “stagflation,” Mr. Johnson did say the sluggish U.S. recovery could be accompanied by rising unemployment and inflation.

Michael Mussa, another former IMF economist speaking at the same Washington forum, predicted Tuesday that personal consumption during the current economic downturn will plunge by the largest amount of any postwar recession, while the unemployment rate will take its biggest leap in more than 60 years.

By those standards, this would be the steepest recession in the postwar period, Mr. Mussa said.

Both prominent economists released their latest global economic forecasts at the Peterson Institute for International Economics, where they are senior fellows. Mr. Mussa was more upbeat about the eventual recovery than Mr. Johnson.

Not only does Mr. Mussa expect the U.S. economy to begin expanding during the third quarter of this year, he believes the rebound will emulate the traditional V-shaped recovery. In contrast, Mr. Johnson's sluggish recovery would be L-shaped, meaning after the economy hits bottom, it will likely remain stagnant for a while before it starts expanding.

Mr. Mussa places his confidence in the eventual impact of the Federal Reserve's “enormously expansive monetary policy on both sides of its balance sheet.” The Fed is providing credit by buying up all kinds of assets and, on the other side of its balance sheet, Mr. Mussa said, “the Fed has been just stuffing excess reserves onto banks.”

By the time the Fed is finished, Mr. Mussa expects those excess reserves to total between $1.5 trillion and $2 trillion. “There will be plenty of credit available to the bank system and plenty of incentives for banks to lend the money out,” he said.

For Mr. Johnson, the banks are one of the biggest parts of the problem.

“The U.S. has become much more fundamentally unstable because of the way the financial sector developed,” making the nation “a lot more like emerging-market countries than we have ever seen before,” he said. “We allowed to develop in this country a sector that is dangerous and caused this extraordinary degree of collapse in the U.S. and the global economy.”

Mr. Johnson fully supports the Fed's dramatic policies, even though he worries about their inflationary impact. But he said the administration's financial-rescue plan “caters too much to the financial sector in ways that are not good for the growth of the economy.”

He doubts, for example, that the Treasury's plan to remove toxic assets from bank balance sheets will succeed.

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