Postcrisis economy: calmer but slower
With no investment banks and tighter regulation, experts see a less dynamic recovery ahead.
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This is the likely outcome because financial innovators – the people who dreamed up those risky mortgage-related investments – will now have regulators in their offices, economists say. Deals that used to bring in huge profits and also funded everyone from entrepreneurs to credit-card users will now be examined much more closely.
How much of a tempering?
Mr. Dickson estimates that once the economy recovers, it could reduce growth in the nation's gross domestic product by up to half. "In the first and second quarters of recovery, instead of growth of real GDP of 5 to 6 percent, it could put a cap on the recovery of 2.5 percent to 3 percent," he says.
The battle over regulation began in earnest Tuesday, as administration and Federal Reserve officials pushed Congress to act this week to pass a massive $700 billion rescue plan proposed last week by Treasury Secretary Henry Paulson. Any delay would be "unthinkable," said Tony Fratto, a White House spokesman.
"We believe that strong and timely action is urgently needed to stabilize our markets and our economy," Federal Reserve Chairman Ben Bernanke told the Senate Committee on Banking, Housing and Urban Affairs.
But in urging quick action to pass the bailout, Paulson and Mr. Bernanke both called for reform of the financial system. "It's critical," Bernanke said Tuesday. "The Federal Reserve will give full support for fundamental reform of the financial industry."
On Wall Street, the stock market recovered somewhat Tuesday morning from its sharp losses on Monday after doubts were raised the rescue plan would pass. Last week, euphoria about the plan had helped the Dow Jones Industrial Average gain over 778 points in two days. The price of oil, which had soared a record $16.37 a barrel on Monday, fell back somewhat in morning trading.
In the past, some Wall Street investment houses thrived in volatile markets. But now, many of them are seeking some stability. That is why Goldman Sachs and Morgan Stanley, the two remaining major independent investment banks, won approval Sunday night to become commercial banks.