Headed for recession?

Marketplace Staff Sep 20, 2006

Headed for recession?

Marketplace Staff Sep 20, 2006


SCOTT JAGOW: The Federal Reserve meets today to decide whether to bump up interest rates or leave them be for a second straight month. Just about everyone expects the Fed to leave short-term rates where they are. The Fed’s long string of rate hikes has helped ease inflation pressures and there are signs that the economy is slowing down. But is it doing more than that? Like heading for recession. Commentator Clive Crook shares his thoughts.

CLIVE CROOK: In this brave new economy, the main thing holding people back may be innovation.

As workers get replaced with computers and other smart machines, the demand for some kinds of labor gets squeezed.

That could be temporary, but add an economic slowdown to this gloomy mix and things will get worse before they get better. And a slowdown of one kind or another is coming.

That’s because of what’s happening in the housing market. House prices all across the country are finally topping out. In some places, they’re falling.

Some economists talk about a housing bubble, like the dotcom share-price bubble of the late ’90s. If that’s right, and the bubble goes pop instead of gently deflating, a full-fledged recession is likely.

Many more people invest in houses than they ever did in the dotcoms. So people will have a heck of a lot more to complain about.

The economy’s last recession, five years ago, was pretty mild. Back then, partly by accident, partly by design, the administration boosted demand with lower taxes and higher public spending.

The Fed chipped in too, with very low interest rates that pumped the housing market.

But those policies are getting harder to use. The budget deficit is too big already, leaving no room for more spending or tax-cuts.

The Fed has a new chairman, Ben Bernanke. He wants to establish his inflation-fighting credentials so he won’t be as keen as Alan Greenspan to cut interest rates again at the first sign of a slowdown.

That’s bad news for people with big mortgages and for Republicans. The economy, according to the polls, is already leaning Democratic. Between now and 2008, it might just tip over.

JAGOW: Clive Crook is a senior editor of Atlantic Monthly and a columnist for National Journal.

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