Is American Economy Heading Towards Depression?

The US economy may be on the downslide but that is nothing when compared to the massive pall hanging over the Wall Street.

The heavy US investors say that although the nation’s economy is getting worse and it is continuing its downward slide, it will certainly recover later in the year, maybe in about six months or so.

However, things are different on the Wall Street, after more than $300bn vanished from the US equity markets. Wall Street is being taken to task, for the mistakes that led to this credit crunch and people who were part of it all are paying the price now. The prediction is that the way back to health for Wall Street is a very long one.

One economist from UK even warned that the world may be close to experiencing something like the Great Depression of 1930, and traders say that they have never felt this sort of fear before. The reason behind these feelings is the emergency funding package by the Federal Reserve and JP Morgan Chase to rescue Bear Stearns. This sort of funding procedure was first used in the 1930 depression and rarely used ever since.

Another problem facing the market is that, in spite of the Federal Reserve feeding $200bn, the banks are still not ready to lend to each other.

The general consensus is that the banking system has been broken since last summer and the credit crisis that it fostered is nothing like anything seen in the past many years.

Most people are pessimistic and they feel that it may take anywhere between 12 to 18 months, before banks may get back to lending.

Ken Griffin, chief executive of Citadel Investment Group LLC said, “It is the Great Depression on Wall Street. It sure isn’t on Main Street.” According to Griffin and other big US investors, the credit and housing crises that led to hundreds of billions of dollars in losses for Wall Street firms, will take the investment banks many years to recover from.

According to Ken Moelis, a former UBS banker, “Until you see Wall Street put on their party hats again and get on the tables and start dancing is going to be years. It will be a long time for Wall Street to come back to where it was.”

Competition in the private equity is going to be pretty dormant in the next few months but even when it does come back; it is not going to be in the size that it was the last few years.

Many people foresee that there may also be job losses on Wall Street as investment banks’ business dried up and they are struggling to regain their footing. It is expected that there will be a loss of about 200,000 jobs in the next year or so; as it is going to be at least one whole year before they can get back in business and offer loans.

Senior analysts feel that failing banks, higher prices, disappearing jobs and a war to pay for, are certainly not indicators of a growing economy and we may be heading for a Depression.

The thought of a Depression is scary, if we look back into the 1930s and see the damage and emotional trauma that was caused. Unemployment reached above 13 million and people started living in primitive conditions and close to famine. It was also said that one family from New York, moved into a cave in Central park. There were millions of people moving around the country, looking for jobs and companies hung huge boards that said, “No Men Wanted.” At that point, the entire American banking system reached a point of collapse.

It took ten years for the America economy to recover from this.

Let us just hope all the analysts are proved wrong and things change for the better soon before they get out of hand.