NYSE by Brian Glanz

It may seem that economists across the world love tragedies. Their commentaries are full of dire predictions about Europe, Canada, the US, and the world at large. Almost no one predicted the US recession before it came, but now, this won’t happen again. Specialists predict every (im)possible disaster. And yes, some of them are real threats.

The World Crisis

It all began with the collapse of the booming housing market in the US in December 2007. Canada entered the recession at the end of 2008. The financial crisis was based on reckless lending practices by financial institutions and the securitization of real estate mortgages in the US, and it led to a sharp drop in international trade, rising unemployment, and slumping commodity prices. It’s also considered to be a cause of the political instability in several countries, including Ireland, France, Egypt, and Tunisia. In 2009, 21 banks fell, and a year before, two more banks didn’t survive. Canada overcame the crisis without any bank failure, but its loss of GDP was 3.36 per cent.

The reasons, consequences, and current state of recovery are well-known due to the huge amount of books, documentaries, newspaper articles, journals, and magazines that cover the topic. However, before the housing bubble crashed, only a few economists considered the possibility of a global recession. According to Dirk Bezemer’s work, “No One Saw This Coming,” only twelve specialists warned that the crisis could come. There were countless plans for the US economic recovery; unfortunately they weren’t very effective.

Only Weak Recovery

Harvard University’s Joint Centre for Housing Studies released disappointing news in June. Its State of the Nation’s Housing Report showed that the housing market hasn’t played its expected role in the economic recovery and is still very weak. Mortgages have remained unpopular, home prices have continued to fall, and the main driver of the US housing market has become renting. Still, many economists believe, that housing will drive the US recovery.

At the end of June 2011, STRATFORT’a analysis showed that although the crisis is over, „the recovery is losing momentum“. Unemployment hasn’t managed to move below the 400,000 level, the S&P 500 have been still low and unstable, retail sales have been only moderately strong, wholesale inventories have been only growing slightly, and the total bank credit has been contracting.

The crisis is over, but recovery is in sight. And now, the US has to face a new problem: its outstanding debt.

The Debt Crisis

Dollars Roll by Images of Money

Almost $14,6 trillion in debt is the other major US problem, and in fact, the whole world’s problem. While the world was afraid that Republicans and Democrats wouldn’t reach an agreement and the debt ceiling wouldn’t be increased, the debt was still growing. It was quite clear they wouldn’t let the US economy go bankrupt, so when the parties came to an agreement, hardly anyone was surprised. But it is not the ultimate solution; it just gave the world more time to solve the problem.

“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said in an interview on Bloomberg Television. “There’s now a 50 per cent chance that we could slide into a new recession. Nothing has given us much growth.” Such a calculation (50 per cent) is more than speculative, but it represents the worries of many other specialists. How will the US manage to significantly reduce its debt? Is it even possible, or has it just bought enough time to go forward to the next elections?

Because we have no precedent to consider, it’s difficult to predict the effects of the crisis. Specialists believe it’s better to predict the worst than to be as unprepared as everyone was at the beginning of the US recession.

The ceiling has been raised to $16.994 trillion, but a new problem has surfaced: neither the market nor the rating agencies are satisfied!

AAA No More

In Europe, the rating agencies have downgraded three countries for similar debt problems. It’s no surprise that Standard & Poor’s decided to downgrade the US’s triple A rating as well. Moody’s hasn’t changed its rating, and Fitch is going to decide by the end of August.

The world stocks are still in chaos. “The economic outlook is stressing investors to a great degree and sentiment is likely to remain extremely fragile,” said Keith Bowman, equity analyst at Hargreaves Lansdown. “The US economy has been slowing and is moving into a phase where we are going to see spending cuts enforced. Investors are concerned as to where future growth will come from with this backdrop of debt for so many governments.”

The effects of a lower rating could be even more dramatic: lower corporate profits, lower consumer spending, persistent panic on stocks, et cetera. There is also the possibility of getting the US recovery back into a recession. One decision by just one firm could cause such a disaster.

“I definitely think that the ratings agencies have too much power. I don’t think it was sought but it just sort of happened that way,” said one former managing director of a smaller rating agency for the Financial Post. “I think there should be less regulatory reliance on them and much more responsibility placed on the investors to do their homework.”

The agencies are under a great deal of pressure and have to face more and more criticism. “Their track record has not exactly been stellar,” said Lord Peter Levene, chairman of the Lloyd’s of London insurance market. Like many, the agencies didn’t predict the crisis. They also made mistakes in the dot-com boom era, and they didn’t expect Lehman Brothers to go bankrupt. These aren’t their only mistakes. Discussions about how to cut their power are more and more frequent.