SPECIAL COMMENTARY

These stages are the fundamental principles of the universal process. Each is again, within itself, a process of its own formulation. -Georg Wilhelm Friedrich Hegel

Financial Green Shoots

Public policy seeks to resolve certain economic conflicts but such a resolution sets up another set of issues. In the post-WWII period this has been made most obvious by the use of Keynesian stimulus in the 1960s and 1970s which led to stagflation. The latest installation of this story is the mid-1990s effort to stimulate home ownership, which fed upon the globalization of capital markets but ultimately collapsed. The massive monetary/fiscal stimulus today is beginning to work but is setting up its own set of contradictions in the future.

Recovery Possible in 2009

We would certainly agree with Vice Chairman Kohn's assessment.2 Our outlook is for positive economic growth, as measured by real gross domestic product (GDP), by the second half of this year. Yet, our outlook is that the composition of the recovery will be quite different than prior economic recoveries in the post-WWII period. Growth will be led by federal government spending and a modest recovery in consumer spending but this recovery will be below trend for the second half of this year as well as all of 2010. We likely will not witness a V-shaped recovery in housing or consumer durable goods spending as envisioned by some analysts. The composition of the recovery is heavy on federal spending and monetary stimulus, and thus should contribute to economic conflicts ahead.