by William Neikirk
The housing-induced credit crunch continues to fan worries about a recession and give birth to new proposals to keep the economy afloat.
Former Federal Reserve Chairman Alan Greenspan raised eyebrows when he said that troubled mortgage borrowers should get straight cash from the federal government.
Former Treasury Secretary Lawrence Summers raised eyebrows even higher when he called for a $50 billion to $75 billion tax cut, plus better unemployment benefits and an increase in food stamps.
Many people in the stock market have expressed a lack of confidence over the Federal Reserve's, and the Bush administration's, steps to tackle the credit crisis and head off an actual downturn.
But when economic VIPs like Greenspan and Summers say that the government should give out handouts or cut taxes to handle the problem that began in the "subprime" mortgage market for marginally qualified borrowers, these concerns are all the more disquieting.
After Greenspan first made his remarks on a Sunday talk show, he later modified them to say that the money from the federal treasury should only go a limited group of people who are current with their mortgage payments but can't afford them when their interest rates are "reset" to a higher level.
Summers, who gave an interview to the Wall Street Journal and also appeared at a Brookings Institution conference today, was Treasury chief in the Clinton administration. He told the Journal there is a "distinct possibility of a more serious recession that will lead to the worst economic performance since the late 1970s and 1980s."
During part of that era, unemployment rose above 12 percent. Such a recession now would make the 2001 downturn look like a tea party by comparison.
Summers is not alone in fearing a steep recession. There are bears on Wall Street who have expressed the same sentiment. Many believe the central bank and the Bush administration are behind the curve in dealing with the economy. The best Bush could say is that there are "storm clouds" on the horizon. To some, it looks like a Hurricane Katrina is approaching.
The credit crunch has tentacles that reach worldwide. That's because these mortgages were bundled together in large packages and sold as securities to investors here and around the world. Everyone wanted them in the giddy days of the housing boom. Now, having this mortgage-backed paper in your portfolio is a major concern. No one wants it, and there is no way to put a price on it.
Furthermore, it has caused banks to be even more skittish about lending, so that there is fear that even qualified borrowers (such as companies, for example, that hire people) are having a harder time getting loans for legitimate purposes.
No one knows how this will come out over the next year. Most analysts don't predict a recession, relying on hope that the good old central bank will come to the rescue and slash interest rates as needed. But it's hard to stop an accumulating downturn once it starts--it truly is like a juggernaut. That is why some old hands would like to see dramatic action now.