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April 20, 2005

Bruce Bartlett Is Also Worrying About "Hard Landings"

He writes:

Bruce Bartlett: Steering clear of a recession: The place where the greatest danger lies is with Fannie Mae and Freddie Mac... even the tiniest mistake by them could roil markets... the impending retirement of Alan Greenspan as chairman of the Fed.... Lastly... [h]uge budget and current account deficits mean that vast amounts of capital flows are necessary to keep them funded. So far, this has gone well... the Chinese have been so accommodating about financing the.... But now the U.S. is strongly pressuring China to stop doing this in order to allow its currency to rise against the dollar. It is hoped that this will reduce China’s production advantage in dollar terms and bring down the bilateral trade deficit. However, the cost to the U.S. economy if this happens could be greater than the potential gain. At least in the short run, any scale-back in China’s buying of Treasury securities might cause interest rates to spike very quickly. This could prick the housing bubble and bring down home prices, eroding personal wealth and putting a squeeze on those with floating rate mortgages. Hopefully, this can all be managed smoothly and without either a recession or a market break. But it will take great skill and a lot of luck to avoid both.

Posted by DeLong at April 20, 2005 09:40 PM