Tags: Duhon | fiscal | cliff | banks

Author Terri Duhon: Fiscal Cliff Damage Won’t Strike at Once, but Banks May Agitate Downturn

Wednesday, 28 Nov 2012 09:03 AM

By Forrest Jones and David Nelson

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Should the United States careen over the fiscal cliff this January, don’t expect the damage to be inflicted on the economy all at once, said Terri Duhon, a former derivatives trader at JPMorgan Chase and author.

At the end of this year, the Bush-era tax cuts and other benefits are scheduled to expire at the same time automatic government spending cuts kick in, a combination known as a fiscal cliff that could send the economy into a recession next year if left unchecked by Congress.

Lawmakers from both sides of the political aisle have expressed optimism they’ll put political differences aside and tackle the tax and spending reforms needed to steer the country away from the fiscal cliff and more toward lasting, long-term fiscal health.

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But should Jan. 1 come and go without a deal, don’t expect the economy to tank — the tax hikes and spending cuts will take time to run their course. However, do expect confidence to wane as the cliff approaches.

“The fact is it’s not really a cliff. A bunch of things happen, but really the impact will take a while to filter into the system,” Duhon told Newsmax TV in an exclusive interview.

“It’s not as if immediately on Jan. 1 that we are going to be poorer or a bunch of companies are going to go bust," said the author of “How the Trading Floor Really Works.” "That’s not going to happen.”

Editor’s note: To order ‘How the Trading Floor Really Works’ at a great price — Click Here Now.

Fears surrounding the fiscal cliff ahead of time will inflict damage to markets and the economy, as businesses and consumers will hold off on investing and remain in idle since they don’t know what they will be paying in taxes next year.

“Consumer confidence is quite high right now and so the concept of hurtling over this cliff actually could damage consumer confidence, and that is already quite scary,” she said.

On a positive note, banks are well-prepared to handle the fiscal cliff, as many have bolstered their capital levels since the 2008 financial crisis.

“To be fair, I am not sure that going over the cliff means a lot for the banking sector. They have been shoring up their balance sheets for the last four years, they have been adding capital because that is what they are supposed to be doing and, frankly, they haven’t really been giving out any loans because they are not supposed to be taking risk,” Duhon explained.

Banks, however, have been told to boost capital by some and lend more by others, which might not bode well for the economy if the country goes over the cliff and plunges into a period of weak growth or even a recession.

“I think it makes us all a bit schizophrenic when we talk about the banking sector because on the one hand, we are saying ‘you must be supportive of the economy, we are going to lower interest rates so you can be giving out more loans so that people are more keen to borrow’ and do all the things that they normally do when interest rates are low, and yet on the other hand, we are saying to the banks ‘shame on you for taking on all that risk and you better clean it up and not be risky,’” she stated.

“That leaves the banks in a very difficult position.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

As a result, tight purse strings might grow even tighter.

“If we go over the fiscal cliff and then things start to look a bit risky for some people and they do need a bit of extra lending to get them over the next hurdle and the banks aren’t prepared to step up, then it might be worse than the possible predictions,” Duhon said.

Editor’s note: To order ‘How the Trading Floor Really Works’ at a great price — Click Here Now.

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