Nobel laureate economist Paul Krugman says there’s a good chance that the economy will fall back into recession, thanks to the reversal of fiscal and monetary stimulus.
“It is not a low probability event, 30 to 40 percent chance,” the Princeton University professor told Bloomberg.
“The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”
Unemployment currently stands at 10 percent.
The Federal Reserve’s decision to finish its acquisition of mortgage-backed securities and federal agency debt in March could send mortgage rates higher, Krugman says.
And that increase, in turn, could depress the housing market.
“Probably mortgage rates go up some,” he said.
And housing sales may “falter.”
If the Fed sells mortgage-backed securities as part of its withdrawal of stimulus, mortgage rates may rise 1 percentage point, hurting the economy, Krugman says.
The 30-year fixed mortgage rate is now about 5.35 percent.
“Stimulus we know starts fading and goes negative around the middle of the year,” Krugman said.
“Inventory bounce, which is driving things right now, will fade out as inventory bounces do.”
Krugman isn’t the only one worried about the economy.
“We are in a post-credit bubble credit collapse that is ongoing,” David Rosenberg, chief economist for Gluskin Sheff + Associates, wrote on Ritholtz.com.
Economists err in calling this downturn “The Great Recession,” he says. “This is truly a gentle way of saying ‘Depression.’”
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