In the past, economic downturns were deepened or prolonged by the premature withdrawal of monetary or fiscal stimulus. To the extent that the severity of the current downturn has thus far been mitigated by extraordinary credit support, a significantly weaker path of lending--and thereby economic activity--could very likely occur if policy support for the financial sector is withdrawn too soon. In this case, stigmatization of support tools such as liquidity programs, direct lending programs, or government capital injections that make participants unwilling to use such programs will have the same effect as a direct policy withdrawal of the programs. And while the path of credit in this cycle compared with others is encouraging, the downturn in credit evident in the most recent quarter provides a reminder that conditions are still far from normal.
Others seem to agree with Governor Duke. For instance, the OECD is reporting the economy is "fragile" but recovery is in sight. The IMF's John Lipsky has also given indications that the economic downturn is bottoming out, but is beginning recovery. (See Lipsky remarks "Moving Beyond the Crisis"). All indications are, though, that recovery will take some time. See also, Fed Sees Signs of Hope. Moreover, substantial changes to the business and financial environments will need to change.