Friday, March 14, 2008

The impending downturn and the political fallout

In an earlier post I compared the political impact of recessions to the military consequences of using nuclear weapons.

Today Paul Krugman wrote the following:

Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled “Things the Federal Reserve Might Try if It’s Desperate” — although that may not have been obvious from its actual title, “Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation.”

Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper’s suggestions into effect. Unfortunately, however, the Bernanke Fed’s actions — even though they’re unprecedented in their scope — probably won’t be enough to halt the economy’s downward spiral.

After that column had been written, along came the news that a leading U.S. Investment Banker - Bear Stearns - had to be bailed out by J.P. Morgan Chase and the Federal Reserve Bank of New York, and the Dow dropped just under 200 points.

So we seem headed for a recession. However, the Federal Reserve recognizes the fact and is moving quickly to do something about it There is also some budgetary stimulus. That means even a 1929 type crash would not likely be followed by a steady descent into depression, but a rough ride of some kind seems assured at least in the short run. It is going to take some time to reach Canada and the global commodity boom will cushion in the impact for the immediate future but a widespread downturn would affect us too.

The political fallout in the United States should be visible soon.

UPDATE: Bush has admitted the economy is in trouble while Republican Senator Norm Coleman calls it a recession.

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