Housing and the Business Cycle - April 2008
The World Economic Outlook presents the IMF's view of the world economy in spring 2008, with their assessment of current conditions and future prospects.
The world economy has entered new and precarious territory. The U.S economy continues to be mired in the financial problems that first emerged in subprime mortage lending. Strains that were once thought to be limited to part of the housing market are now having negative-effects across the entire economy.
In addition to serious problems at the inter-section of credit and the real economy, the United States remains plagued by profound errors in risk management among its leading financial institutions. Problems that were once thought to be limited to issues surrounding liquidity in short-term money markets - have cascaded across much of the financial sector, triggering downgrades.
The cutback in lending and the associated attempt to reduce risks played a major role in a most dramatic pair of events. First, one of the five largest U.S. investment banks, Bear Stearns, was sold under difficult circumstances - including the presumed imminence of a far-reaching default.
Second, and just as headline-grabbing, were the virtually unprecedented steps taken by the Fed to prevent Bear Stearn's problems from spreading.
The continuing deep correction in the U.S. housing market and the unresolved financial sector problems have led the U.S economy to the verge of recession. In fact, it is now anticipated that the United States will indeed slip into recession - meaning that it will experience two or more quarters of negative growth - during 2008, before starting a moderate recovery at some point during 2009.
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