Irrational anxiety. That’s how Prof. Solita Monsod (aka Mareng Winnie) of the UP School of Economics appraised the current panics and crashes at the NYSE and other stock markets around the world (including our very own PSE), sparked by talks about the coming US recession.
In an interview with Mike Enriquez this morning on dzBB, Mareng Winnie informed the public that there was nothing to worry about the impending US recession, and that all the panicking and sell-offs at stock markets worldwide are merely the result of too much worrying on the part of stockholders. It’s like losing your head in the movies simply because someone cried “fire!” when there’s really none. In effect, the stock market panic is a self-fulfilling problem. And given its inherent instability and volatility, the stock market reacts very much to exogenous events, even though they’re purely speculative.
Although the recession has not fallen upon the US economy yet, chief economists and policymakers there are wary about its coming. They admit that their economy, the largest in the world, is very much heading for a recession, an event it last experienced in 2001 right after the 9/11 tragedy. In fact, the impending recession has been the hottest new topic in the ongoing presidential debates and sorties there. Both Democrat and Republican parties have come up with tax packages and preemptive programs against the recession.
The Federal Reserve has cut its interest rates
Why is the reduction of interest rates important? Because during recessions the economy becomes less productive than before. Firms find it unprofitable to continue their businesses, their production halts and entire industries falter, leading to massive lay-offs and unemployment. By reducing interest rates the Fed aims to revive the economy by enticing businesses to continue their production, spend more, and make more investments.
And according to studies, a large part of corrective measures against recessions is accounted for by reductions in interest rates by the central bank; fiscal policy from the government – where the government uses its control on spending and borrowing to revive the economy – is considered only a “last resort” and a “strategy of desperation” once monetary action from the central bank does not work too well. Here’s how economist Paul Krugman put it:
When monetary expansion is ineffective, fiscal expansion…must take its place. Such a fiscal expansion can break the vicious circle of low spending and low incomes, “priming the pump” and getting the economy moving again. But remember this is no by any means an all-purpose policy recommendation; it is essentially a strategy of desperation, a dangerous drug to be prescribed only when the usual over-the-counter remedy of monetary policy has failed.
The US is in for a big economic event that will inevitably affect the world at large in the coming weeks. Let’s see how the problem gets debated on and solved not just by US politicians and economists but also by actors from around the world (possibly including the Philippines) as well.
Econologue 