Do you think that the whole sub-prime mortgage issues will cause a recession this year?

Question

And do you think that as a result, stock prices will take a major hit?

Oil prices have actually come down a bit, over the past few months or so...and I imagine that war expenses will come down in the near future too, as the Democratic congress is making it look likely that the war will be scaled back within a year...

Answer 1

Actually, I think the causality would be the other way around.

There are two articles in yesterday's (3/14/07) New York Times (both on page C1) regarding the implications of higher default rates in the subprime markets on hedge funds and mutual funds. The mechanisms for these impacts have to do with investments made by mutual funds and hedge funds in both the subprime mortgage companies and in the mortgage-backed assets purchased by them. An increase in default rates (particularly a large increase) dries up the cash flow for the subprime lenders and sharply reduces the value of the mortgage-backed securities.

The potential for the stock market at large to be struck depends on what the mutual funds and hedge funds do in response to these losses. If these funds need a jolt of cash, they may attempt to sell some of their assets (including stocks) in order to generate liquidity, which may lead to panic and a large sell-off in the markets.

It is also possible that investors in these funds may panic and begin selling their shares of the hedge funds and mutual funds that have lost much value due to the subprime defaults, which may lead to a generalized sell-off.

Point is, the fundamentals of the market remain sound, which means that it is only behavioral factors ("Animal spirits" as Keynes called them) that could bring about a market crash.

A recession is entirely a different matter. It is possible that a recession may spring about due to a substantial slowdown in the housing market (since the sale of foreclosed homes will increase the supply of homes available and thus drive down price, slowing the market altogether), which slows the construction markets (since new homes are not as marketable as they were), which slows demand elsewhere.

The first part appears likely - housing starts are down for January. The question is to what extent the decrease in construction will cause a decrease in demand elsewhere in the economy.

Also, note that an increase in demand elsewhere may offset the losses in construction. For instance, it is possible that larger demand for light manufactures, home computers, automobiles, and capital infrastructure may provide a boost.

In order for a recession to hit, there must be at least two consecutive quarters of decreases in GDP this year. This is the definition provided by the BEA, and, if the rest of the first quarter data is any indicator, a recession does appear likely in 2007.
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Note: War expenses (defense expenditures) do not create a recession, but rather are an injection of demand and so create a boom. If you'll recall, the US entered a period of substantial industrial growth during WWII, only to be curtailed later after the war ended and factories reduced production.

Recession is a decrease in GDP, and so it is a DECREASE in war expenditures (not an INCREASE) that will cause recession. This is not a reason to go to war, merely the observation that when an entity spends less, the economy will have less output unless some other entity covers the lost expenditures.

Answer 2

i do no longer think of Bush or for that remember maximum folk or politicians had a clue approximately what the banks have been doing, so he purely confirmed undesirable judgment in the persons he appointed who's job it become to be attentive to, yet probably did no longer. After staring at how they dealt with the reconstruction in Iraq and Katrina we ought to continuously no longer be stunned on the incompetence. the autumn in abode fees commencing in Jan 2006 ( little doubt led to via the Democrats taking administration of congress the autumn of that 3 hundred and sixty 5 days) ended in a million in six homes in the U. S. to have a private loan extra effective than the industry fee of the abode, so as that they could no longer be bought to repay the loan if human beings ought to no longer pay or needed to circulate. This ended in an increasing style of forecloses, which lost Fannie and Freddy and taxpayers approximately 2 hundred billion money on the 0.5 of all mortgages that they owned. although the indoors maximum sector and the banks international huge controlled to unfastened trillions( we don't yet be attentive to how plenty) on the different 0.5, using fact they had gambled on the loan industry and increasing housing values with something referred to as "credit default swaps", and that's this what led to the disaster.

Answer 3

according to "Gordon Michel Scallion" the World famous futurist
we are allready in the World Wide Dipression like the one we had back in 1929 ,It will last from 2007-2009 if you have stocks
sell it now while you are ahead,oil prices will hit $4.00 by the end
of this year

Answer 4

that, plus rising oil prices, plus war expenses will cause a recession.