Berlau: Recession Possible Even if Fiscal Cliff Averted

Wednesday, 28 Nov 2012 04:29 PM

By Forrest Jones and Kathleen Walter

  Comment  |
   Contact  |
  Print   |
    A   A  
  Copy Shortlink
The U.S. could still slide into a recession next year even if Congress steers the economy away from the fast-approaching fiscal cliff, said John Berlau, a Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute.

Lawmakers are debating how to avoid tax breaks from expiring at the end of this year right when deep spending cuts are scheduled to take effect.

The combination of tax hikes and spending cuts, known as the fiscal cliff, could siphon over $600 billion out of the economy next year alone, according to some estimates.

Watch our exclusive video. Article continues below.

The nonpartisan Congressional Budget Office has said failure to address the fiscal cliff could contract the economy by 0.5 percent next year, which would technically constitute a recession.

Lawmakers remain at odds over taxes, with Democrats arguing tax breaks should not be extended for the wealthy, as the government needs the revenue to help narrow deficits.

Republicans counter that tax hikes on the wealthy would hamper recovery, since many in question are small-business owners who would react to higher taxes by putting off plans to invest and hire.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

The latter scenario could inflict serious damage to the economy especially if spending isn't cut, according to Berlau.

"We could avoid the cliff and still get a recession. The question is weighing the cliff against the other alternatives. There's an old expression of 'going from the fire into the frying pan,'" Berlau told Newsmax TV in an exclusive interview.

"It's a bad time in the economy to particularly raise tax rates for anyone."

Many expect Republicans and Democrats to compromise and accept a blend of increased revenue and spending cuts.

Should increased revenue translate into raising tax rates on top of closing loopholes, spending cuts must ensue, or the economy will suffer dearly.

"We are going to have tax hikes no matter what," Berlau said.

"I'm warming to the idea that if we go over the cliff — I'm not saying there won't be any adverse consequences — we will at least get some spending cuts that way."

Lawmakers and market participants have said that Jan. 1 can come and go without a deal, adding tax hikes and spending cuts won't slam the economy in a day or even for several months, which gives both sides of the aisle room to negotiate.

Others have suggested that until a deal is reached, uncertainty surrounding how much businesses and individuals will be paying in taxes next year will crimp economic activity in the meantime.

Best to go over the cliff to make sure spending cuts ensue and the economy benefits over the longer term, said Berlau.

"If the president is insistent on rates being raised, we might as well go over the fiscal cliff," he said.

"Avoiding the cliff might be just as dangerous as going over it."

The fiscal cliff isn't the only precipice lurking on the U.S. horizon, as the so-called Basel cliff looms large as well.

In Basel, Switzerland, international banking bureaucrats are hard at work on the Basel III agreement that would harmonize international capital requirements.

New capital requirements would benefit Europeans and hurt the U.S. by making lending standards tougher when it comes to U.S. instruments such as mortgages, Berlau points out.

It may even force U.S. banks to take on risks they would otherwise avoid.

"It's like a treaty, but it doesn't have to go through Congress for whatever reason that would make it harder for a U.S. bank to make a mortgage than it would to buy a European bond," Berlau said.

"They might have to have four times as much capital against new mortgages but they could easily buy an unsafe Greek bond, and so it's really going to put the bank's safety in jeopardy and at the same time tighten credit."

Those interested in buying a home would suffer, as would smaller businesses in the U.S., Berlau added.

"It's really like a stealth bailout for the European Union's so-called sovereign debt, including that of even downgraded sovereign debt like in Greece or Italy."

Basel III standards could also push the U.S. closer to stagflation, a condition marked by sluggish or little growth and rising inflation.

With the fiscal cliff creating uncertainty and the Federal Reserve out to stimulate the economy via a third round of bond purchases from banks, known as quantitative easing (QE3), the dollar could drop, inflation could rise and he broader economy would ail.

"The Basel Cliff is a part of what I call the regulatory cliff in that it doesn't matter how many mortgages QE3 tries to buy if the regulations from Dodd-Frank or from Basel are so difficult that banks can't make any new mortgages, and that's going to be a problem," Berlau said.

Uncertainty and tough lending regulations would prevent Americans from buying new homes, which would make it difficult for the Fed to buy those mortgages from banks to spur recovery since there won't be any mortgages to snap up with freshly printed money.

Considering the U.S. is awash in liquidity anyway, inflation climbs and all suffer.

"The Fed can't find new mortgages to buy, you are still going to get new stagnation and then really stagflation because people will still see the dollar cheapening. The worst of both worlds, I am afraid."

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

© 2014 Moneynews. All rights reserved.

  Comment  |
   Contact  |
  Print   |
  Copy Shortlink

 
Email:
Country
Zip Code:
Privacy: We never share your email.
 
Follow Newsmax
Facebook
Google Plus
You May Also Like

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved