U.S. Economy May Suffer for ‘Long Time’

The U.S. economy will suffer from the effects of the global financial crisis for “a long time” as a slowdown in demand spreads to other countries, former Federal Reserve Chairman Paul Volcker said.

“We’re in the middle of a kind of massive economic crisis,” Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, said today at a Columbia University conference in New York. “We’re going to hear the reverberations about this for a long time.”

Volcker characterized the downturn that started in December 2007 as “not like a typical recession in the U.S. or elsewhere.” He also cautioned that U.S. government and central bank efforts to revive credit markets should only be temporary to alleviate the risk of inflation.

Volcker said he is “shocked” by the international reach of the slowdown.

“The rest of the world has not held up,” making it harder for the U.S. to rely on strong export growth to emerge from its economic slump, he said.

“Industrial production in most countries is going down faster than in the United States,” Volcker said.

The U.S. economy will contract 2 percent this year, making it the deepest annual slump since 1946, according to a Bloomberg News survey of economists taken this month. Gross domestic product shrank at a 3.8 percent annual pace in the last three months of 2008, the Commerce Department said in January.

Volcker also discussed rising prices, saying even “a little inflation is bad.” The cost of living in the U.S. rose last month for the first time in six months as the consumer price index rose 0.3 percent, the Labor Department said today in Washington.

The Crisis Takes Hold
The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market. As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.

The Federal Reserve took unprecedented steps to bolster Wall Street. But still the losses mounted, and in March 2008 the Fed staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JPMorgan Chase for a price that was less than the worth of Bear’s Manhattan skyscraper.