The U.S. recession will be long because investors have lost a large amount of household wealth, says Harvard University’s Martin Feldstein.
Investors expecting a recovery by the second half of 2009 are “overly optimistic,” the former Reagan adviser told the Taipei Times.
Recessions in the past were beset by too much inventory and investing too much money in business equipment.
This downturn is far worse because of the declines in stock prices and home values and construction, resulting in a loss of US$12 trillion of household wealth in the United States alone, Feldstein said.
“Previous reactions to declines in household wealth indicate that such a fall will cut consumer spending by about US$500 billion every year until the wealth is restored,” he said.
“While a higher household saving rate will help to rebuild wealth, it would take more than a decade of relatively high saving rates to restore what was lost.”
Global growth is now close to zero, said A. Michael Spence, an emeritus professor of management at Stanford who won the Nobel Prize in economics in 2001.
The World Bank predicted Sunday that the global economy will shrink this year for the first time since World War II. Trade will fall to its lowest point in 80 years, the bank said in a report.
Investors and companies will need more time to lower their debt, Spence told The New York Times.
“This has lowered sales, profits, credit quality and, completing the loop, asset values,” Spence said.
“This interacting spiral is what makes this recession exceptional. The short answer is, ‘Not soon.’”
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