<p><a href="http://www.ft.com/cms/s/0/8fc8a006-b969-11dc-bb66-0000779fd2ac.html">Danger ahead: The prospect of recession again confronts America</a></p>
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<p><em>At the heart of the problems is the bursting of the housing bubble that helped to power American growth since this economic cycle started six years ago. The end of the bubble has brought a brutal slide in home construction, house price falls that threaten to undermine household wealth and consumer spending, and turmoil in the credit markets that are used to finance housing.</em></p>
<p><em>The US has endured financial crises before with little or no effect on the real economy – for example, in 1987 and 1998. But these were autonomous financial crises with little connection to the underlying US economy. This financial crisis is different. It is defined by the bursting of twin bubbles in housing and the credit markets – bubbles that were deeply interconnected.</em></p>
<p><em>Easy money and the collapse of discipline in the credit markets helped push house prices to unsustainable levels. But when the residential property bubble finally burst it took the credit market bubble with it – decimating the value of hundreds of billions of dollars of securities linked to subprime loans that were safe only as long as house prices kept going up.</em></p>
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<p><em>“It is not all subprime,” says Jeff Frankel, a professor at Harvard. “Even without that, the magnitude of the fall in house prices itself is a prime candidate to cause a recession – [through] what it has done to the construction industry and household finances. Then there is oil.” The high price of oil and food is putting additional strains on consumer spending, reducing disposable income and eating away at real wage gains. Richard Berner, chief economist at Morgan Stanley, says the rise in energy and food prices between June and December alone “drained about $45bn or 0.4 per cent from consumer discretionary income”.
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<p><em>Traditionally, economists would expect the price of oil to fall when the US economy is weak, freeing up some disposable income and acting as a natural stabiliser. But strong demand in China and India plus geopolitical tensions in the Middle East are keeping oil hot – compounding the housing and credit problems.</em></p>
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