After Friday's stock rally on the U.S. bailout of bad loans held by U.S. financial institutions, stocks went down and oil prices rose today resulting in headlines like U.S. Stocks Tumble on Concern Bailout Won't Stop Recession. Looking back at the Swedish financial crisis of the early 90's, which as a percentage as GDP seems to be close to the current U.S., and the Japanese of the 90's, it should be pretty obvious that putting bad loans into government-owned entities don't make away with recessions. What getting the loans of banks' balance sheets can do is to get the banks to focus on current and future business, instead of being overly conservative with extending credit to shore up a horrible balance sheet. A short recession instead of a long-term dysfunctional financial sector is a good outcome from a bailout given the current circumstances.
The going away of easy credit for consumers, will likely continue to be a significant hit to consumer spending. The Big Picture had this very telling chart on how much GDP growth has been driven by mortgage equity withdrawals in the U.S. this side of 2001 already three years ago. With falling home prices and a credit crunch, mortgage equity withdrawal obviously is not an option any longer.
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