Expect U.S. economic woes to linger into 2009

The financial troubles in the United States are far from over. The economic downturn, probably already a recession, could last deep into 2009, with rising unemployment and continuing business failures.

That's the view of several economists.

"This is not like credit crunches of the past," notes Washington consulting economist Harald Malmgren, in an e-mail from Tokyo. "What we are going through is a gradual, painful credit contraction, as lenders try to gather new capital and reduce their [loans]."

Milton Ezrati is less pessimistic. "The worst is done," says Dr. Ezrati, a senior economist of Lord Abbett & Co., a mutual fund company in Jersey City, N.J. But he also expects subpar economic growth "well into 2009" as financial institutions continue to writeoff weakened assets and consumers restrain expenditures after "a debt binge for 20 years."

Henry Kaufman, a veteran Wall Street economist dubbed "Dr. Doom" in the 1960s, figures the mess in securitized assets, such as those loaded with sub-prime mortgages, is "60 to 65 percent over." But because banks and other financial institutions will extend less credit, the economy will "scoot along at close to recession levels" for the next couple of years, he says.

The economy has already been in a recession since early this year, maintains Allen Sinai, top economist at Decision Economics in Waltham, Mass. The credit crunch will last "at least another year."

Paul Kasriel, an economist at Northern Trust Co. in Chicago, predicts a "very mild recovery" from recession in the first half of 2009. Meanwhile, financial institutions will be dealing with more losses in credit-card debts, auto loans, and commercial real estate loans. Corporate profits, outside the energy sector, will be weak. The high-yield corporate bond market (junk bonds) will be troubled by more failures. Many consumers will face tighter limits on credit-card debt and on home equity loans.

It's not a pretty picture.

In a way, all of these problems can be blamed on dishonesty.

"Greed was the underlying factor," writes Russell Palmer, CEO of a private investment group in Philadelphia and a former dean of the University of Pennsylvania's Wharton School. "Wall Street hedge funds and others are looking for any financial machination that they can find to hype their financial returns. The whole mortgage fiasco is just the latest example."

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