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Study Finds Americans will be Permanently Impacted by the Recession

Like a ripple effect, the recent recession will impact Americans for years to come, according to a study released Monday by the ""Mortgage Bankers Association"":http://www.mbaa.org/default.htm (MBA).


Conducted by Professor Joe Peek, Gatton Endowed Chair in international banking and financial economics at the ""University of Kentucky"":http://www.uky.edu/, and sponsored by the ""Research Institute for Housing America"":http://www.housingamerica.org/default.html, the study - ""Household Reaction to the Financial Crisis: Scared or Scarred?"":http://www.housingamerica.org/RIHA/RIHA/Publications/72744_9858_Research_RIHA_Peek_Report.pdf - analyzed how Americans will respond to the current crisis in terms of consumer spending, saving rates, credit supply, and implications for the strength of the economic recovery.

""While Americans, and the American economy, are noted for their resilience, the current financial crisis and recession exceeded the devastation created by other post-World War II recessions,"" Peek said. ""Saving rates have risen substantially, and many Americans will continue to cut their spending sharply out of necessity, others out of fear of what the future holds. Since consumer expenditures account for about two-thirds of GDP, we are facing the ‘paradox of thrift' as households try to rebuild their net


worth, with the reduced spending likely to delay and weaken the recovery from the ‘Great Recession'.""

On the housing front, Peek said it is unlikely that the dramatic rise in loan delinquencies, home foreclosures, and bankruptcies will show a meaningful decrease, as high unemployment and low house prices are widely projected to remain for an extended period. In addition, he said the rise in problem loans will restrain banks' willingness and ability to provide credit.

According to Peek, America may unfortunately face the possibility of being caught in a vicious cycle. He said cutbacks in consumer and business spending are likely to contribute to a more anemic recovery, which in turn, will cause a deepened and prolonged weakness in spending and further undermine the recovery.

The longer the malaise in economic activity continues, the more likely diminished spending will persist. This, Peek explained, will adversely affect future economic growth and the standard of living. He said such headwinds to a strong economic recovery are likely to have lasting impacts on the values and behavior of the current generation, much as the Great Depression had on its generation.

""The severity and duration of the most recent downturn far exceeds what we have experienced in past recessions and has resulted in the disruption of millions of lives,"" added Michael Fratantoni, MBA's VP of research and economics. ""We can't know for certain at this point, but it is more than reasonable to prepare for a world that has been irrevocably changed by this experience. For the many reasons discussed in this study, we should expect hesitant homebuyers, cautious businesses, and conservative lenders in the years ahead.""

About Author: Brittany Dunn


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