There's glaring evidence that the next recession will be entirely different from any in recent history. Here's why experts worry we're ill-prepared to combat it.

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  • Several policy responses to the Great Recession have made the
    US economy vulnerable to a different kind of downturn that could
    arrive within 18 months, according to to the Economic Policy
    Institute.
  • The Washington, D.C.-based think tank recently detailed what
    could cause the next recession, and why it won’t be easily solved
    by traditional tools. 
  • Visit Business
    Insider’s homepage for more stories. 

Wall Street was central to the genesis of the last two
recessions, as it facilitated the bubbles that brewed in housing
and software stocks. 

But the next recession is unlikely to be triggered by overpriced
assets, according to the Economic Policy Institute, a Washington,
D.C.-based think tank that recently published a report
examining the next major downturn.

Josh Bivens — the EPI’s director of research, who also
authored of the report — focused instead on other causes that
have been in the making during the nearly 10 years of economic
recovery.

For starters, he said there’s a “real possibility” that the US
slips into recession within the next 18 months, thanks to excessive
interest-rate increases and the fading impact of tax cuts.
He echoed prominent economists like
Paul Krugman
and several Wall Street experts who see a
heightened
risk of a downturn
by the end of 2020. Krugman, like Bivens, is
concerned that we’re not adequately prepared to handle the next
shock.

“The US is poorly prepared for the next recession — but not
for the reasons most people think (allegedly too-high public debt
and too-low interest rates),” Bivens said in the report. 

Instead, he said we’re poorly prepared for reasons including
policymakers’ failure to rein in the power of the financial sector
and to fight inequality.

Read more: The world’s largest hedge fund just
warned that the ‘most pro-corporate environment in history’ is in
danger — and said the fallout could send stocks plunging

Although Bivens counted out asset bubbles as the primary cause
of the next recession, he doesn’t let Wall Street off the hook
completely. In fact, the way regulators treated Wall Street amid
the 2008 recession is one contributing factor to why, in his view,
we’re ill-prepared to combat the next recession. 

The Federal
Reserve
rushed to the financial sector’s aid to prevent it from
collapsing during the last crisis. By 2009, measures of market
stress, such as the spreads between Treasury yields and other
interest rates, were back to normal. Stocks also started
rallying.

The return to a sense of normal probably weakened the sense of
urgency among regulators to ensure a recovery for all, not just
Wall Street, Bivens said. And the repercussions will have to be
confronted as the next crisis nears.

His other reason struck at the heart of what Bivens described as
the underlying cause of most recessions: a slump in aggregate
demand. Put simply, recessions happen as people curtail their
spending en masse and the businesses they patronize respond by
implementing cost-cutting measures including layoffs.

Inequality has worsened this dynamic, Bivens said. Low- and
middle-income households tend to spend a higher share of their
compensation than richer households. However, their wage growth has
been sluggish for most of this expansion, thereby placing a cap on
how much aggregate demand they have been able to generate.

As it stands, any sudden dent to their incomes would be damaging
not just to the individuals but to the economy. 

It’s not only households that have faced a ceiling on their
ability to spend, according to Bivens. For most of the recovery,
the US government was skittish about fiscal stimulus because of
concerns about the level of debt. 

Ironically, this is exactly the tool needed to fight the next
recession — not primarily Fed policy, in Bivens’ view.

“A key lesson from the Great Recession is that fiscal policy is
the most effective tool for aiding recovery,” he said. “Monetary
policy can lay the groundwork for fiscal policy, but really cannot
be relied on to play more than a supporting role for fighting
recessions.”

SEE ALSO: The
research chief at the world’s largest hedge fund unpacks a market
that’s suddenly opening up to US investors — and why the gold
rush is a once-in-a-lifetime opportunity


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Source: FS – All – Economy – News
There's glaring evidence that the next recession will be entirely different from any in recent history. Here's why experts worry we're ill-prepared to combat it.