The Long Road To Recovery
Financial markets appeared to be headed in the right direction this week as mortgage rates fell to record lows and the stock market regaining some of it’s confidence. While the low mortgage rates may spur a wave of refinancing, there is still a long way to go before the housing market returns to normal.
The key event that may start us on the road to recovery may have come last week when the Federal Reserve announced that it would commit $1.05 trillion to purchase a combination of mortgage and Treasury securities. While foreclosure are still a major problem, the wave of refinancing will help a lot of households avoid that trap.
Right now the government is praying that we don’t see anymore major events that will disrupt markets once again. For the most part it seems as if most of the fires have been put out but all it takes is one spark to push back the time frame for recovery back once again.
Economic cycles take time to play out and this one is no different. Even if financial markets were to magically return to normal overnight, it will probably be at least a year before this recession runs it’s course.
The economy will likely shed jobs for some time with the damage that has already been done. There is also the fact that it will likely take as many as three years for the economy to realize the full benefits of the recent stimulus package, although consumer spending should receive a boost within the next six months or so.
The federal government will be exerting more control over the economy for quite some time and businesses will have to operate under increased regulations and scrutiny. This is another cycle in it’s own right, for the past two decades we saw a steady flow of deregulation of financial markets, to the point that many companies became so highly leveraged in the credit derivatives market that it put the entire economy at risk.
Although the government today announced plans for an overhaul of the financial market, that won’t happen overnight and the economy still faces considerable risk from all the unfunded liabilities and counter-party risk that has built up since the derivatives market exploded onto the scene earlier this decade.
Unfortunately history has already shown that while a government run economy may make things less risky, it will also make it less efficient.
