No finagling at the top alone will restore the American economy. 75 percent of the economy is driven by the spending of ordinary consumers and they are frightened. Call it PTS and it will not be cured easily. The distribution of free booze and Prozac will jerk start spending again. That is the only quick fix that is possible.
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The world isn't as dependent on the U.S. consumer as it was 10 or 15 years ago; there is indigenous demand now in Eastern Europe and China. Indeed, the rest of the world isn't in recession now because of the U.S. economic downturn.
High oil prices are a drag on the economy, even though we're more efficient than we were in the 1970s, when we had the last energy crisis. The biggest effect in the immediate future is political. Americans hate paying a lot at the pump, and they take it out on politicians. That's bad news for Republicans and good news for Democrats.
Conditions will likely remain difficult
Robert Rubin, Treasury secretary under Clinton, now chairman of the Citi executive committee
We are in a very uncertain and complex environment. There are a range of possibilities, and we can wind up anywhere on that spectrum. That said, I think there's a pretty high probability that conditions are going to remain difficult and that the principal problem is going to be consumption. Oil prices are plainly at levels that are impacting the consumer. We have falling housing prices. We have a zero percent savings rate and a high level of debt. The Federal Reserve can lower interest rates, but that doesn't automatically translate into new loans extended. There are a lot of people who believe that credit is likely to remain tight. So the Fed lowering rates is only one part of a process. Something like the legislation that Rep. Barney Frank has introduced, which is intended to catalyze the renegotiation of currently and potentially troubled mortgages, would be helpful.
There's another key point. It's very important to focus on the short term, and the terrible problems the situation is creating for people. But I think that there's a massively more important issue facing us: the long-term economic health of this country. I think we can do very well in the long run, but there's so much we have to do with regard to health care, energy, the fiscal situation and education to realize our potential. And I hope we don't lose sight of that.
The psychological impact will only get worse
Wilbur Ross, billionaire investor and past director of the Turnaround Management Association and American Bankruptcy Institute
I wish I could agree with treasury secretary Henry Paulson that we'll have a second-half rebound. The American consumer is both tapped out financially and burned out psychologically, so I don't see any reason that miraculously, three weeks from now, the whole world will change. The tragic attrition in home values has to have a negative wealth effect, a poverty effect, just as when homes were going up it made people feel more prosperous. I don't see the housing market turning, and I believe the psychological impact will get worse. Economists seem to think that a change in housing prices has a 3.75 to 7 percent effect on consumer spending in either direction. So at the low end you have an impact of $135 billion less in consumer spending.
People were using their homes as an ATM machine with bedrooms attached. That's over with. In the last five years, consumer debt rose from $9 trillion to some $13.5 trillion. In 2006 alone, Americans took out $350 billion from their homes in home-equity loans or second mortgages.
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