Economists say 2008 may will be a year to forget.

Analysts at American Economic Association now see recession as a given

NEW ORLEANS -- Gathered in this city struggling to regain its footing after Hurricane Katrina, a group of leading economists said the U.S. is getting hit by another damaging storm: the global credit crunch.

Many analysts gathered at the American Economic Association's two-day annual meeting spoke of a recession as almost a given but differed over how severe it will be.
"The recession is likely to be a serious one," said Dean Baker, co-director of the Center for Economic and Policy Research.

He estimated losses in prime mortgages will be two to three times the $160-$200 billion hit seen in the subprime sector. This, he said, will lead to large losses at banks and difficulty for Fannie Mae and Freddie Mac.

University of Chicago professor of finance and former chief economist at the International Monetary Fund, Raghuram Rajan, said questions in the media over whether the U.S. economy will fall into recession are really only about semantics.

"We are going to have very low growth in the first two quarters of the year. Whether it is negative or zero, it is going to feel like the same thing," Rajan said.
But he added that it remains an "open question" whether an even more serious slowdown develops in the second half of the year.

"One of the big issues is the extent to which the credit crunch initiated by the subprime crisis starts spreading and how much does it affect smaller corporations and poorly rated corporations," he said. "Do we have a bank credit crunch which starts impacting on retail credit for small and medium enterprises? There is some uncertainty."

Alistair Milne, a professor at the City University of London's Cass Business School, told MarketWatch he's expecting "a really weak year," but added that "it is too early to say how deep the crisis is going to get."

"There has been a substantial credit expansion in many areas -- not just subprime -- over the past five to 10 years," he said. But now, with credit now under pressure, he sees the risk of a vicious cycle developing where the decline in bank lending pushes down growth, which further reduces bank lending.

"If there is a severe enough downturn, it will make all the credit problems worse," he said, adding that the crisis would also hit credit card debt and leverages buyout loans.
But Milne also pointed to a bright spot, namely sovereign wealth funds pouring money into troubled banks, which shores up capital and could help prevent an extreme economic downturn.
He also said that the Federal Reserve is moving in the right direction and that the European Central Bank is likely to follow with rate cuts within six months, adding that a negative economic shock will take the pressure off inflation eventually.

Still, he said, the economy won't likely get back on track until 2010 and will require more capital from overseas.

Can the government help?

Several economists at the conference said attention needs to turn to a possible government stimulus package to take the punch out of the downturn.

The likely magnitude of coming economic difficulties makes it important for Congress to take action on the fiscal side, complimenting easing by the Federal Reserve, they said.

President Bush has also indicated support for crafting a stimulus package to help the economy.
But many analysts argued that the government may be powerless to prevent a downturn.
"My sense is that even though the government wants to be seen as reactive, there is not that much they can do at this point," Rajan said. "Monetary policy has lags of a year. It can't revive lending that isn't taking place because banks have capital constraints."

Baker said he supports the idea of a stimulus package but added that it has to be big -- over $100 billion -- and it has to be fast.

Princeton economist and New York Times columnist Paul Krugman was skeptical that Congress would put aside partisan politics over tax policy in order to pass such measures.
"One side will not accept tax cuts for rich people, and the other side won't take fiscal action without tax cuts for the rich," he said.

The news are from MarketWatch.