According to many of the reports from the Federal Reserve's Board of Governors meeting in Jackson Hole, WY last week, many of the governors are increasingly worried about the likelihood that we are entering into a negative feedback loop. Frederic Mishkin refers to this as adverse feedback loop, but it is the same thing.
Here is what may be happening.
Tightening credit standards, at present due to loses and mark-downs in the banking system (and in the future potentially due as well to regulation) mean that credit becomes less available. Not only can people not borrow to buy new houses or new cars or whatever, but companies cannot get the credit that they need to expand their business. As a result, these investments and purchases are not undertaken, and the economy incurs knock-on losses and declines.
Concern is now rising over the negative feedback loop (especially given the absence of any sign that we are anywhere near the bottom in this housing recession) and realization that the entire worldwide economy, and not just the US economy, are now slowing. This double wammy we may or may not through the economy into a recession or a depression, but it is certain to give us a long and profoundly difficult bear market.
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Related Articles:
Treasury Secretary Paulson Says Market Turmoil Will Slow Growth, Not Stop It by David Walsh - Aug 16, 2007
Greespan Predicts China Will Determine World Economic Fate by Hong Konger - Sep 21, 2007
IMF Assesses Impact of Credit Crunch on Global Markets by Sam Cass - Sep 24, 2007.
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