US ponders: How deep is economic abyss?
Updated: 2008-03-24 11:07
Back then, the Standard & Poor's 500 index fell 36 percent from its peak to its trough. Right now, the S&P 500 has only lost 15 percent from its record highs of October 2007.
Finding shelter from this downturn isn't as easy as you might think. So-called private label products - no-name cereal or crackers usually far cheaper than brand names - are less of a deal because of soaring commodity prices.
Nearly 90 percent of chief financial officers of global public companies don't see an economic recovery coming until 2009, according to a new survey by Duke University/CFO Magazine.
And that's more than just crystal-ball gazing: If companies see a sluggish recovery, they won't be taking any steps to build their payrolls soon and will remain cautious in how they allocate capital.
So what's the way out?
Former Fed chair Alan Greenspan wrote in the Financial Times last week that the financial crisis - which he said would likely be the "most wrenching" in the United States since World War II - would end only when housing prices stabilize.
Already, the Fed has slashed interest rates. It has cut the closely watched federal funds rate, the overnight lending rate for banks, six times since September, from 5.25 percent to 2.25 percent - two-thirds of the cut coming in the last two months alone.
But the Fed can't work alone. Upcoming tax rebates for millions of people and tax breaks for businesses may give a little relief, but economists think that something will have to be done soon to slow down the number of foreclosures, a cornerstone of the economy's woes.
"We can't have financial institutions not providing credit to the economy," said Eugene White, a professor of economics at Rutgers University. "We have to stop that if we want to avoid a deep recession."
Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart - determining how deep the wounds from the mortgage mess really are - also makes it impossible to map the path of the downturn.
"Financial crises happen, but they always do blow over," Sylla says. "It's a question of how long."
So in the meantime, Americans like Monica Nakamine are planning for a long road ahead.
The 37-year-old took a higher-paying job at a Los Angeles architectural firm, but has been putting the difference in her earnings right into savings. These days she's dyeing her own hair, picking through sales racks when she shops and washing her dog herself, rather than getting him groomed.
And she's considering some drastic actions in case things get worse - like moving to a cheaper city such as Austin, Texas, and getting rid of her gas-guzzling SUV for a hybrid sedan.
"Certainly I don't want it to get any worse," Nakamine said, "but I know it can."
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