David Wessel at the WSJ argues that the worst part of the recent financial turmoil may be over. Fewer speculators are betting on big defaults, and treasury yields are up. This marks the end of the beginning, Wessels argues, a phase in which institutional finance was nearly brought to its knees.
While the first act of this economic saga was all about Wall Street, the next act will be all about Main Street, as the story shifts from defaulting banks to higher unemployment, deflating house prices, inflation, and declining GDP. Wessel:
So much for the markets. What about the rest of the economy? Employment is falling. So are housing prices. The bulk of forecasters in the latest Wall Street Journal survey foresee home prices declining into 2009; nearly one in eight say they won’t touch bottom until 2010.
Prices of food and energy are rising. And a credit crunch is sure to make it tougher than usual for American consumers to borrow to keep spending. (President Bush is probably relieved he isn’t up for re-election.) Macroeconomic Advisers, the St. Louis forecaster that makes a monthly guess about gross domestic product, estimates the U.S. economy contracted at a 13% annual rate in February, the sharpest monthly decline in its data since September 2001.
Offsetting that drag on the economy is the vigor of U.S. exports. And, of course, the impact of the interest-rate cuts the Fed already has made and the checks Mr. Bush and Congress decided to send to most American families this spring has yet to be fully felt. “The fiscal stimulus is in the mail,” says Richard Berner, a Morgan Stanley economist. “The monetary stimulus is in the pipeline.”
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