The United States subprime mortgage crisis and its implications for the Caribbean

The bursting of the property bubble – subprime mortgage crisis – in 2007 in the United
States has engendered panic, recession fears and turmoil in the global financial system. Although
the United States economy grew by 0.6 per cent in the last quarter of 2007, down from 4.9 per
cent in the previous quarter, day by day worsening scenarios emerge, from escalating oil prices,
to a depreciating dollar and financial institutions’ bailout by the Federal Reserve. Many
economists and policy makers share the view that a subprime-led recession – i.e. two consecutive
quarters with negative growth – is inevitable and will be much deeper and longer than the 2001
dot-com downturn. Moreover, the critical situation of the financial system has driven some
analysts to argue that should the monetary policy response fails to restore confidence among
investors, the outcome would be the worst crisis seen since the Great Depression. This
pessimism is not only among specialists. Indeed, in late March 2008 the Consumer Confidence
Index in the United States recorded its lowest level since February 1992.
A recession in the United States will undoubtedly have an important impact on the world
economy, despite the continuous rapid growth experienced by emerging economies, particularly
China and India. The purpose of this article is threefold: first, to characterize the current situation
in the United States economy; second, to discuss the economic policy responses; and finally, to
elaborate on how Caribbean economies may be affected.