The collapse of the American property market helped to start the downturn
One of the world’s leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years.
Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: “We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.
“To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness.
“This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven’t seen previously.”
Professor Shiller’s comments come as the unemployment rate in America is rising astonishingly fast.
Last week official figures showed that the US lost 524,000 jobs in December, with the overall unemployment rate rising to 7.2 per cent – the highest level for 16 years.
With about 11.1 million people out of a job, the total number of unemployed is about 50 per cent higher than a year ago.
Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9 per cent of the workforce and that there is a high chance that it will reach at least 10 per cent.
Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve.
He said: “This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates.”
Professor Shiller, who has recently published The Subprime Solution – How Today’s Global Financial Crisis Happened, and What to Do About It, also warned that plans to try to limit foreclosures had met with resistance from those who felt “they had paid their mortgages, they had done everything right, but that they are now being taxed for those who did not”.
The housing market in the United States is widely seen as one of the main causes of its economic troubles.
Spurred by low interest rates and initiatives to promote home ownership, residential real estate boomed for a decade.
Professor Shiller, who co-founded the authoritative S&P Case/Shiller home price index, was one of the first to predict that the housing market would slump and that this could bring down financial institutions.
He said: “So far the Government isn’t doing much. [President-elect Barack] Obama has not made any announcement. They do not have anything going. I would have thought that Obama would be receptive [to a rescue plan to stem the rate of foreclosures].”
– Obama Says Recession Requires Scaling Back Promises (Bloomberg)
– Obama Shows Reluctance to Look at Bush Policies (New York Times)
January 12, 2009
Suzy Jagger in New York
Source: The Times