Catastrophic Financial Meltdown Avoided

Senior Fellow Alice Rivlin responds to the Washington Post’s inquiry as to whether she agreed with the Federal Reserve’s statement Wednesday, following a better-than-expected employment report and brisk auto sales, that the economy is “leveling out.”

If you have lost your job, the worst may not be over for a long time. If you have a job, you may still lose it. The main reason for optimism is that the rapid deterioration of the economy has slowed down. Production and sales may even start increasing gradually in the next few months. For many businesses, the worst may be over. But don’t expect a bounce. Scared consumers are hanging on to their cash, bemoaning the lost value of their houses and trying to reduce their debts. They won’t rush back to the mall to buy things they don’t absolutely need. Employers will be cautious about hiring until they are sure the recovery is robust, so unemployment will remain high for several years.

Public intervention has stabilized the big financial institutions, some of which are making substantial profits. To many this seems unfair, since it was the mistakes of those institutions that caused the crash. Unfair or not, a catastrophic financial meltdown was avoided. We’ll have a long slog back to prosperity, but another Great Depression is not going to engulf us all.