The aftershocks of the credit crunch are "damaging growth," the Economic Forecasting Center's Dr. Rajeev Dhawan said Wednesday. He discussed the "nervous" economy and predicted a bailout for embattled mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE).
"Credit aftershocks are damaging growth," he said at an Economic Outlook Conference at Georgia State University in Atlanta.
Citing August 2007 as the beginning of the economic turmoil, Dhawan noted that there have been and will continue to be several aftershocks following the collapse of the subprime market.
"The big one happened last year in August - that was the big event," he said. "You know there will be aftershocks you cannot predict when they will come."
"Luckily for us the aftershocks has not been as terrible as the original one," he added, noting that the big aftershock was "when liquidity froze up."
The Federal Reserve's actions to help with the liquidity crunch, including the TSLF and the TAF, are "relief camps," Dhawan said.
On the issue of Fannie Mae and Freddie Mac, Dhawan showed little doubt that there would be government assistance to the mortgage lenders, who remain in a precarious position.
"You know what's coming, whether your call it bailout, whether your call it direct ownership, whether you call it breaking up the companies," he said.
"In some form or the other, there's a bailout. The Tab's going to come later on, not now," he added.
He discussed the collapse of the tech bubble, noting that only a few companies that declined 70 or 80 percent in stock value have regained that ground.
Many financial companies, including Fannie and Freddie, Wachovia (WB), and Washington Mutual (WM), have also lost more than 70 percent of their stock value.
"Some of them are really in bad shape," Dhawan said.
Calling his economic forecast a "bit more crusty" than usual, Dhawan predicted a recession, adding that economic growth will remain below potential in 2010.
"Be prepared. Start saving," he warned.
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