Are we at the end of the Financial Crisis?
The stock market has rebounded from the crash of 2008 and the economy is growing. However, questions remain as to whether the financial crisis that sparked the "Great Recession" is finally over.
Opinion is divided among financial experts as to whether we are actually out of the woods yet. While GDP is rising and even stubborn unemployment figures have been moving in a positive direction lately, there are still worrisome problems that could undermine the markets.
From the macroeconomic standpoint, the most difficult obstacles in the way of financial stabilization are the housing market, the deleveraging situation and the threat of inflation.
Housing market still in trouble
According to an estimate by foreclosure database RealtyTrac, the number of foreclosures expected through 2012 will reach 2 million. Currently, there are about 3.5 million homes on the market, which is about 43 percent more than "normal."
However according to research group CoreLogic, there is also an unofficial shadow inventory of about 1.8 million homes. These are homes that are not yet listed but are expected to enter the market soon. In addition, there are about 2 million homes that are severely "underwater" having high negative equity that are in danger of abandonment. Mortgage resets will climax in August and September of 2011, so we could see problems worsen near the last quarter of the year. Of course, the housing meltdown is what triggered the last financial crisis according to many experts, so we cannot discount the possibility of another round of market turmoil. The question will be whether sufficient changes have been put in place to delink any possible future housing meltdown with the stock market.
Debt and deficits
One of the widespread problems that was brought into greater scrutiny by the Great Recession was the massive amount of debt and red ink weighting down the economy. National and local governments in particular were hit hard by the shutdown of the financing markets. In an interconnected world, government austerity programs around the world are threatening to undermine future growth. Many national and local governments are cutting back on spending and terminating workers without decreasing taxes. Many states are unable to meet their current budgets without federal assistance, and that assistance is scheduled to dwindle in coming years.
In past recessions, the government has played a key role in maintaining production and job growth but the current environment will make it difficult for politicians to obtain needed funding. Lending institutions are still saddled with bad debt and this may be the main reason that capital markets are still very slow. The banks may be using government bailout funds to protect against future economic uncertainty especially in the real estate market.
Consumer debt was also a problem. With a high number of bad mortgages and no fuss payday loans, the average American was in more debt than was good for him.
Inflation and Quantitative Easing
The Federal Reserve's latest round of "quantitative easing" has many analysts scratching their heads about possible future impact on the economy. One of the most pressing questions is whether it will lead to runaway inflation. Some experts already blame the Fed's policy for raising prices around the globe. However, there are other forces pushing up inflation besides monetary policy.
Recent turmoil in the Middle East has sent oil prices about $100 a barrel and fuel prices have also shot upward. According to most political analysts, there are no signs that the uncertainty in the Middle East will end soon. Even the formerly stable Gulf oil kingdoms have been shaken by the recent turn toward democracy in the region. High oil prices tend to push up the prices of other products because of the role of petroleum in transportation and production. Rising inflation is an old enemy of economic growth and we could see pressure on central banks to adjust their monetary policy. Uncertainty about prices and interest rates could cause churning in the equity markets and threaten yet another bear market.
Due to so many outstanding problems in the national and world economy, it is still too early to say whether we are out of the financial crisis that started in 2007. At the very least, we need to see how the housing situation winds down through 2012. In addition, the problems in the Middle East cannot be ignored. How long will it take before things stabilize in that important oil-producing region?
Debt problems in nations like Portugal and other EU nations, and also those among state and local governments in the United States are also cause for worry. It may take a few years at least before we can sort out these problems for a firm assessment.