Standard & Poors does not predict a deep recession

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This time, post the financial coup, the Dow Jones average of industrial stocks surged by approximately 400 points and the markets elites have in fact started claiming that the capitalist crisis is over. “Standard & Poors does not predict a deep recession,” insists John B. Chambers Chairman, S&P Sovereign Rating Committee. But one wonders, is it really the end, or will history repeat itself?

Roubini opines that in a recession, the S&P 500 typically drops by 28% and having come off 12% so far, it has a long way to go. Financial crises do not come along until and unless there are underlying problems; and the problem lies in the stark differential between production and consumption patterns in the US. Former Fed Chairman, Paul Volcker, too has critically questioned the rationale behind the Bear bailout and cuts; according to him (when addressing the Harvard Business School), “The only trouble (with the US economy) is you can’t go on forever spending more than you’re producing.”

The Senate Banking Committee also questioned the $30 billion taxpayer bailout for a Wall Street firm while people on the Main Street struggled to pay their mortgages. Ben Bernanke had this to say to the committee, “...damage caused by a default by Bear Stearns could have been severe… the adverse impact would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values as well as on credit availability.” The committee apparently seems to have bought the logic, but some market watchers apparently have not. Victoria Wagner, Credit Analyst, S&P, calls it a risky move as she feels that, “The mortgage GSEs (Government Sponsored Enterprises) face heightened demand to provide mortgage financing, which comes at a time when their need to raise capital and improve earning has come under extreme pressure against the backdrop of a historically weak housing markets and seized securitisation markets.”

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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