The prospect of a 2022 US recession still well alive
- Mateusz Dunaj
- Oct 30, 2022
- 3 min read
Ever since the American economy recovered from the 2008 housing market crash, economists all over the world have been speculating about another failure of the Federal Reserve in keeping the economy in check, just as they hadn’t managed to do during the biggest financial crisis since the Great Depression. Now, with war brewing in eastern Europe, COVID went over the horizon, and inflation skyrocketing in almost every corner of the world, one only can begin to wonder - is the crisis coming back?
First things first, the 2008 financial crisis. To put it in short, the collapse was caused by a burst of the housing loan market bubble, which was based on something called MBS. Without getting into detail, MBSs are a type of asset which consists of “packs” of loans, which are bonded together and sold to investors. Those assets make money for the investors only once the majority of the loans are paid on time, or in other words, do not fail. Before the crash, some investment banks seemed so confident in their debtors, that they started to include fewer certain loans in their MBSs. This, connected with the fact that banks started giving out so-called “subprime loans”, which in simple words mean the fact that anyone, even without a decent credit score could get a mortgage and the financial rating agencies being more or less pressured into giving those subprime MBS’s guarantees of trusted financial institutions, led to something that only a handful of people over the world predicted. The risky subprime mortgages started failing because of rising interest rates, which in turn led to panic within the investment banks, with some even managing to fail only because of those MBS’s failures (most notably Lehman Brothers, one of the largest investment banks in the world, deemed “too large to fail”).
So, now that we know the basics about the 2008 crisis, we can finally go onto talking about the current economical situation. It all seems alright now, doesn’t it? The US is still the largest economy, the jobs market is booming, new investments under president Biden are shaping a bright future for America. Well, if you look under the surface, things don’t seem so certain. Actually, all of the signs of recession are already here - GDP has shrunk for 2 quarters straight, consumer trust in the economy is the lowest it’s been for a long time and consumer spending has plummeted ever since the pandemic started. To be precise, 8 out of the top 10 CEOs of the largest US companies agree that a recession is well on its way, and this, if connected with the fact that OPEC, (Organisation of Oil Exporting Countries) just cut the yearly exports by 2 million barrels, might seem like a grim image for the western economies.
On the other hand, some economists say the opposite. Unemployment is at the lowest it’s ever been, consumer prices are only slightly rising and the FED is trying to control the inflation by raising interest rates, which seems good for eliminating the risk of excess liquidity in the market. As a quote from Robert Gordon, an economics professor at the Northwestern University says, “There is currently a conflict between the robust growth of employment and the modest declines in some other monthly indicators”, so maybe all the faith that we’ve put in the American economy for years shouldn’t fade away just yet.
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