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By: Eric Orzehoski
February 7, 2023
The Great Recession in 2008 left the United States population in a tough spot, many people struggling to afford the basic necessities to live. Ever since the recession, the economy has recovered and succeeded in gaining the ground it lost back. After spending an enormous amount of money to get our country through the COVID-19 pandemic, the consequences are starting to be realized. Recently, the securities and exchange commission (SEC) resumed talks about conflicts of interest regarding security safety; the federal reserve continues to raise interest rates; and the government is proposing another increase to the debt-ceiling despite inflation remaining considerably high.
As of January 25, 2023, the SEC has proposed banning a Wall Street practice that remains partly to blame for the market crash in 2008. The proposal to prohibit conflicts of interest on securities such as mortgages has been in talks since 2011, but there has been consistent backlash from companies who benefit from this, such as Goldman Sachs Group. By not describing all of the risks associated with the securities to their investors, large banks and industry groups got away with misleading clients, ultimately allowing the banks to cash in on the market collapse. Thinking about this re-introduction of the proposal during a time with rising interest rates, historically high spending, and inflation worries opens up the question: Is our economy headed towards another recession?
With recent spending still higher than expected, the federal reserve continues to raise interest rates, with the current federal funds rate at 4.50-4.75 percent. This comes after the rate was raised by a quarter percentage on February 1, 2023, which is a slowdown but still an increase. As of now, six days later, the chair of the federal reserve Jerome Powell has announced that fighting inflation will be more difficult than expected, which hints that at least a few more interest rate hikes are in the near future. Powell stated, “we think we’re going to have to do further [rate] increases, and we think we’ll have to hold policy at a restrictive level for some time” (WSJ). Once again, with increased rate hikes comes the expectation that spending will have to decrease, and the economy could slow itself into a recession.
The last time the United States hit the debt ceiling was in December of 2021. Normally, the debt ceiling is increased as needed, so therefore the government does not default its loans and can remain open. Once again, with increased spending due to the pandemic and aiding other countries such as Ukraine in their war against Russia, the debt ceiling is close to being reached. This led to talks of increasing the debt ceiling; however, with the Republicans running the House of Representatives, there is uncertainty whether there will be enough votes for the approval. At the same time of this happening, the Federal Reserve is attempting to decrease inflation by increasing interest rates as mentioned earlier. This has proven to be difficult, after it was announced on February 3, 2023, that the unemployment rate decreased unexpectedly, showing that the economy is still spending. In turn, inflation could keep increasing even though it is already at 6.5 percent, when the federal reserve’s goal is two percent.
Looking at the federal funds rate chart makes me question if a repeat of 2008 is possible, even if it is only a slight chance. The combination of the SEC trying to protect consumer security safety, the increase of federal funds rates, the approach of the debt-ceiling, and a continued increase in inflation all leads to a recession in my eyes. CEO of Bank of America, Brian Moynihan, stated he believes there is a “mild recession” in the works. The question is not whether a recession will occur, the question is how severe the recession will be, and that is what should be of concern to the people.
Sources:
https://www.wsj.com/articles/sec-weighs-ban-on-wall-street-activities-linked-to-financial -crisis-11674658288?mod=Searchresults_pos5&page=1
https://www.wsj.com/articles/feds-jerome-powell-to-address-economic-outlook-with-hiri ng-surge-in-spotlight-11675781503?mod=saved_content
https://finance.yahoo.com/news/hope-not-strategy-bank-america-122303056.html https://www.marketwatch.com/story/can-the-fed-prevent-a-recession-11675729503 https://www.techtarget.com/searchsecurity/definition/Securities-and-Exchange-Commissi on-SEC
https://www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling#:~:text= The%20federal%20debt%20ceiling%20was%20raised%20in%20December,to%20last%2 0until%20at%20least%20January%20of%202023.
https://www.usinflationcalculator.com/inflation/current-inflation-rates/ https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
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